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Edited Transcript of CUERVO.MX earnings conference call or presentation 30-Apr-20 2:00pm GMT

Q1 2020 Becle SAB de CV Earnings Call

May 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Becle SAB de CV earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Suárez Gerard

Becle, S.A.B. de C.V. - CFO

* Gordon Dron

Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific

* Juan Domingo Beckmann Legorreta

Becle, S.A.B. de C.V. - CEO, GM & Director

* Luis Fernando Felix

Becle, S.A.B. de C.V. - General Director of Mexico & Latam

* Mariana Rojo Granados

Becle, S.A.B. de C.V. - Corporate Treasurer & IR Officer

* Michael J. Keyes

Proximo Spirits, Inc. - President & CEO

* Steve Shanley

Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits

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Conference Call Participants

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* Benjamin M. Theurer

Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director

* Felipe Ucros Nunez

Scotiabank Global Banking and Markets, Research Division - Analyst

* Fernando Olvera Espinosa de los Monteros

BofA Merrill Lynch, Research Division - Associate

* Miguel Angel Tortolero

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Peter K. Grom

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. Thank you for joining Becle's first quarter 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.

Now I'll welcome Mariana Rojo, Corporate Treasurer and Investor Relations Director. Miss, you're now on the line.

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Mariana Rojo Granados, Becle, S.A.B. de C.V. - Corporate Treasurer & IR Officer [2]

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Thank you. Good morning, everyone. I'm Mariana Rojo, Corporate Treasurer and Investor Relations Director. Thank you for joining us to discuss the unaudited financial results for the quarter ended March 31, 2020, of Becle, commercially known as Jose Cuervo.

I am joined today by Juan Domingo Beckmann, Chief Executive Officer; Michael Keyes, President and CEO of Proximo Spirits; Steve Shanley, Senior VP of Commercial Strategy for Proximo; Luis Felix, Managing Director of Mexico and LATAM; Gordon Dron, Managing Director of EMEA and APAC Regions; and Fernando Suárez, CFO.

Before we begin, I 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 first quarter of 2020 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in the appropriate electronic formats.

(Operator Instructions) Now I will turn the call on to Mr. Juan Domingo Beckmann.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [3]

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Good morning, and thank you for joining us today to discuss Becle's first quarter results. Our thoughts at Becle hope that each and every one of you is staying safe and healthy, and we hope you are all successfully navigating these unprecedented and challenging times.

I will begin with opening comments, and then I will ask Mike Keyes to discuss performance of our U.S. and Canada business unit. Luis Felix will review our Mexican and LATAM results. Gordon Dron will discuss our results in the EMEA and APAC regions. And Fernando Suárez will then walk you through our financial results.

We have all encountered an unprecedented and unparalleled situation with the global COVID-19 pandemic. This challenge has impacted each of our daily lives, our families and how we do business on a daily basis. We hope for a return to a more normal times and an economic recovery across the world. But in the interim, we need to be cautious and careful how long will this take.

At Becle, we responded quickly to the rapidly developed increases -- crisis and evolving macro environment. Before the pandemic declaration from the WHO, we have already begun early in the year with a war-room approach in our global integrated supply chain by working closely with our supply and distribution partners to develop plans to ensure we can continue to support our customers around the world. Once the pandemic was declared, we took on business continuity measures and transitioned many of our employees to working remotely from home while maintaining production and business activities as well as ensuring the health and safety of our employees. We are extremely appreciative of the efforts of each of one of our employees and their dedication during this extraordinary and unprecedented times.

As the first quarter progressed, the impact of COVID-19 containment measures across our global markets accelerated and began to impact volumes. This has continued into the second quarter, in particular, as the on-premise channel has been mostly shut down. Notwithstanding these challenges, during the first quarter, net sales increased 5% year-over-year on an underlying basis despite a volume contraction for the same period. Our strong financial position with a solid balance sheet and global liquidity enabled us to better navigate these complex macroeconomic and business conditions. Additionally, the strength of our brands along with our high exposure to off-premise sales in key markets is mitigating the impact on total volume, and we remain well positioned with the leading portfolio of brands in high-growth categories across the global spirits industry.

In the social responsibility front, we are committed to support those in need during these extraordinary times. In this sense, I'm proud of our recent charitable activities, which include donations of $1.2 million and other efforts as part of our commitment to help families and individuals who have been affected by the economic impact of the COVID crisis.

The funds will be directed to the Children of Restaurant Employees, a nonprofit dedicated to serving the children of food and beverage service employees who are facing the crisis; the World Central Kitchen, a team of food first responders, mobilizing with the urgency and getting meals to those who need the most, including children, families and seniors as well as frontline health care workers; and to the U.S. Bartenders' Guild Emergency Assistance Program.

Additionally, we have donated hand sanitizers to first responder teams and health centers around the production facilities in Indiana, Colorado, California, New York and Northern Ireland. In Mexico, we donated to the Ministry of Defense and maybe 40,000 liters of sanitizing product which is being used to protect the health of first responders and others in the handling of the crisis. Next week, we will also announce a plan to support 11,000 food service employees.

Now let me turn the call over to Mike Keyes to discuss our U.S. and Canada results.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [4]

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Good morning, everyone. We're pleased with our commercial performance in the United States and Canada during the first quarter of 2020. Consumer takeaway for our brands in the United States, as measured by Nielsen data, grew over the past 3 months by 16%, outpacing the top 15 multi-branded suppliers in the industry. Wholesaler depletions were also up 16% for the quarter. Our tequila portfolio was up 23% for the quarter driven by the continued strength of our super premium tequilas. Our ready-to-drink margarita category performance was strong in March, which helped to drive 17% growth for the quarter. Our whiskey portfolio also grew 8% during the quarter, led by our Irish whiskey brands, which were up a total by double digits.

Last quarter, we discussed a change in the depletion reporting policy for our California distributor. The reversal of that effect is reflected in this quarter's depletions and represents 4.5% of the 16% growth that we've reported. Strong consumer takeaway and underlying depletion growth during the quarter continued to drive strong shipment trends. We recognized 6% growth in shipments for the quarter compared to the prior year.

During the quarter, we continued to advance our premiumization strategy with net sales value growth outpacing volume growth in the United States and Canada at 11% due primarily to the mix of products sold during the quarter. We experienced a net positive impact from the shelter-in-place orders that were imposed during the month of March. Gains in the off-premise outweighed the losses in the on-premise from the closure of bars and restaurants as consumers stocked up on well-known and established brands.

Due to our strong ready-to-drink business, Proximo Spirits is over-indexed within the off-premise channel with approximately 87% of our value coming from the off-premise accounts, providing us less exposure than most for the closure of the on-premise channel.

We will continue to monitor the situation and adapt to this ever-changing business environment. We have worked hard to keep our supply chain functioning while we partner with our distributors to meet the increased demand in the off-premise, and we are developing contingency plans to address the unknown changes that will materialize as the on-premise reopens.

I will now turn the call over to Luis Felix to discuss Mexico and Latin America.

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & Latam [5]

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Thank you, and good morning, everyone. We had a difficult first quarter in Mexico primarily driven by the nonalcoholic categories. But to a lesser degree, softness in the whole tequila category. Our energy drink called B:oost underwent a reformulation as a result of recent excise tax on energy drinks implemented within this -- with the new year. We did not ship B:oost product from the middle of January until late March. We did begun -- begin to ship reformulated products at the end of the quarter, and we'll work to stabilize B:oost shipment volume. Additionally, we continue to be challenged by a difficult economic situation across the country with an expected sharp GDP contraction this year.

Underlying volume in the Mexico region declined 40%, with net sales declining 16% during this quarter. Excluding the effect of B:oost, the volume decline in the quarter was minus 23%, with net sales value declining minus 10%.

As the quarter progressed, we also began to see the impact of the COVID-19 containment measures across Mexico with nearly all on-premise locations closed beginning in March which represent approximately between 20% to 25% of our net sales. We expect the on-premise closures to continue at least through May, mainly impacting our wholesaler channel. Within the modern trade, we experienced flat depletions resulting from COVID containment measures in the country as well as alcohol sales restriction in 5 states and certain municipalities in Mexico City.

In Latin America, we saw a very positive results with strength in Brazil, Peru and Colombia. We are, however, now seeing the same impact from COVID-19 in Latin America, which has begun to impact our shipments.

Despite the industry challenges to volume as a result of the economic environment in Mexico, the COVID-19 containment measures as well as the B:oost reformulation, we continue to see strong market share with value share gained through February, and we remain well positioned across Mexico spirits industry.

I will now turn the call over to Gordon Dron to discuss the EMEA and APAC results.

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Gordon Dron, Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific [6]

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Many thanks, Luis Felix, and good afternoon from Europe. The EMEA and APAC region had an overall positive first quarter despite the impact of COVID-19, which started to impact China from mid-January and reached Europe at the end of February. Initially, the impact was felt in Italy and then spread across Western Europe. Social distancing practices have been adopted uniformly. The majority of the on-premise channel is now effectively shut down.

The EMEA and APAC regions overall grew volume by low single digits year-on-year in quarter 1, although showing a slight loss of value, reflecting the challenges of the on-premise environment and the country mix.

For these specific regions, there were differing results depending on the lead time of supply-to-market and the timing of the COVID-19 impact. In EMEA, tequila sales grew by mid-double digits, reflecting the early positive consumer trends for our brands, most notably Cuervo. Indeed, even analyzing depletions, we can see year-on-year growth through to mid-March and then a drop-off as the impact of the on-premise closures have began across the region. The net sales value encouragingly grew slightly ahead of volume.

On the rest of our spirits portfolio, the impact is different for several reasons, but mainly driven by the COVID-19 impact on travel retail. Early country loading by consumers began to slow by mid-March, and the distributors slowed orders, with shorter lead times in Europe.

On a positive note, our own in-market company in the U.K. and Ireland recorded strong portfolio sales growth in the first quarter versus last year. All that said, overall EMEA volumes were broadly in line with last year although value declined by high single digits.

In APAC, partly due to China, but also volume shortfalls in other major markets hit by COVID-19, tequila sales fell by double digits. Additionally, in Japan, fourth quarter orders ahead of a market price increase impacted Q1 volumes. However, in Australia, we had an exceptional first quarter reporting double-digit growth in tequila and even stronger growth on rum, helped by our brand innovations towards the end of February.

So overall, despite the challenging times in which we are operating, we are encouraged by the overall performance of the EMEA and APAC regions during the first quarter and look forward to a gradual normalization of business conditions in our markets.

I will now turn the call over to Fernando Suárez to review the financial results.

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [7]

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Thank you, and good morning, everyone. Let me walk you through the first quarter financial results.

During the first quarter, the company reported a 5.3% increase in consolidated net sales to MXN 5.2 billion on a pro forma or underlying basis. This pro forma or underlying growth accounts for the nonrenewal of the distribution agreement of the Cholula Hot Sauce brand during April of 2019.

During the first quarter, gross profit decreased 3.4% year-over-year to MXN 2.7 billion. And although a sequential quarterly gross margin expansion, gross margin decreased to 51.7% from 52.8% for the first quarter of 2019, primarily reflecting year-on-year agave price increases in costs, partially offset by a Mexican peso depreciation against the U.S. dollar, impacting our net sales.

AMP expenses increased 16.7% during this quarter primarily driven by solid depletion trends in the U.S. and Canada and EMEA regions. We continue with our efforts to optimize our AMP investment on a full year basis across our regions.

In the first quarter of the year, distribution expenses decreased 14.3% to MXN 188 million mainly driven by lower logistics and fuel costs. As a percentage of net sales, distribution expenses decreased to 3.6% from 4.2% in 2019.

SG&A expenses increased 10.6% during the first quarter, representing 14.7% of net sales compared to 13.1% in the first quarter of 2019, mainly due to a base effect in last year's period related to variable compensation schemes.

Operating income in the first quarter of 2020 decreased 48% as the operating margin decreased to 9.9% from 18.7% in the first quarter of 2019.

First quarter EBITDA decreased 40% year-over-year to MXN 688 million, while EBITDA margin was 13.2%.

Net financial results were a gain of MXN 429 million during the first quarter of 2020. As a result of its exposure of the exchange rate risk between the U.S. dollar and the Mexican peso, as of January 1, 2020, the company has designated its $500 million senior notes as a hedge against its net investments in its U.S. operations.

As disclosed in our earnings release, the adoption of IFRS 9, IFRIC 16, net investment hedge accounting treatment, all foreign exchange gains and losses associated with the company's senior notes have been recognized in the other comprehensive income line. The specific amount that resulted from this accounting criteria adoption was MXN 2,334 million in OCI.

First quarter consolidated net income decreased by only 0.8% to MXN 698 million, and the net margin increased to 13.4%. Earnings per share were MXN 0.19 per share for the first quarter.

As of March 31, 2020, cash and cash equivalents were MXN 9.9 billion, and total long-term debt was MXN 11.6 billion. We continue to maintain a solid balance sheet with conservative financial leverage, comfortable debt maturity profile and liquidity to execute our long-term growth strategy. We have no refinancing requirements for the next 5 years.

Regarding our CapEx program, we will maintain our strategic expansion projects, the most significant of which are our 1800 distillery in tequila and the OBD expansion in Northern Ireland. This, of course, is on top of our normal and customary maintenance CapEx. All other lower priority, nonessential CapEx projects are being reassessed and potentially recalendarized in light of cash optimization measures.

Moving on to guidance for the year. Given the uncertainty surrounding the COVID-19 crisis and impact, we will hold off on yearly volume guidance for now. As soon as we have better clarity, we will evaluate a public announcement of such guidance. However, rest assured that we are committed to regaining top line growth as soon as practicable.

On the capital allocation front, we will be proposing a dividend payment, treasury share cancellation and share repurchase program extension in our next General Shareholders' Meeting to be summoned for the month of June. Details of such amounts will be proposed at that time once we have a better understanding of the developing business environment.

Now we will turn the call back to the operator for questions and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Ben Theurer with Barclays.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [2]

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So first of all, for Juan Domingo, I hope you're feeling better and glad you made it over the COVID situation you personally have. So that's at least good news to hear you back on the phone.

Two quick questions. So first, in Mexico, you've mentioned the B:oost reformulation and the impact it had from mid-January until late March and that you're basically now back into shipments. Can you give us a little bit of a sense on the velocity of getting back on shelf, getting the shipments out, particularly in under the light of the restrictions that might be surrounded from the shut down here in Mexico as well as what costs were associated with the reformulation? And if you could try to at least give us a little bit of a sense on how much the loss of that had an impact on profitability? That would be my first question.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [3]

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Thank you, Ben, for your comments. I'm feeling great now. Thank you very much. I'll ask Luis Felix to talk more in detail regarding the B:oost reformula and then status as of today.

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & Latam [4]

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Thank you. Yes, we did ship to Jumex back -- and strong volume by the end of the year in December. So they were able to maintain distribution in January and February. So we took the month of January and February to reformulate and then we came back in the last -- we shipped back to Jumex in the last week of March. So Jumex is taking back the distribution, and they have been very effective in continuing supplying basically the self-service stores. And remember, they also have a strong direct distribution to traditional stores. So they continue to operate their business. And we have been checking all the distribution. We are back in Walmart, we are in their distribution level, in the direct-to-traditional stores, we are back. So we expect that B:oost will go back quickly into the shops.

The reformulation, in recognition we were able to -- there was a 25%, yes, taxation imposed to energy drinks. With the reformulation that we did, we will not be exposed to that yet, which will give us a good pricing opportunity in the market.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [5]

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Okay. And then, Juan Domingo, that's -- it's more of a strategic question and considerations in the current environment. I mean clearly, it's challenging, the fact that you lose for a certain period of time on some of your off-prem -- on on-premise exposure. You've seen significant increase on the off-premise side, so there might be certain disruption challenges from a distribution point of view, getting product into retail and so on.

Now in light of that, and we know you have your M&A strategy, and I was particularly wondering, with some of the commentary we've got recently from Campari's CEO around looking for potential mergers, acquisitions and so on, could you envision at some stage to potentially go together with someone to further strengthen your global footprint, your brand footprint, with someone like potentially Campari, who now might have some financial flexibility? Or do you still have -- stay more on the view of you being the one going after brands, acquiring without being maybe part of a larger complex?

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [6]

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Well, for the moment, I think our focus is to do as best as we can during this year. Obviously, we are always open to -- if we see opportunities to acquire more brands in a more strategic, let's say, big opportunity. I think for the moment, we are okay. But you never know in the future what could happen. At the moment, I think we are doing great. We are 1 of the 2 companies that grow most -- well, the multi-brand company in the U.S., we are the one that grows the most. So the only other company that grows the most is [Ketel]. So that's a one-brand company, which at the moment, they stopped at making it, facing difficulties. So now we're in great shape.

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Operator [7]

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The next question comes from the line of Andrea Teixeira with JPMorgan.

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Peter K. Grom, JP Morgan Chase & Co, Research Division - Analyst [8]

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This is Peter Grom on for Andrea. Can you guys hear me okay?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [9]

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Yes.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [10]

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Yes.

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Peter K. Grom, JP Morgan Chase & Co, Research Division - Analyst [11]

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So first off, Juan Domingo, I'm also glad to hear that you are feeling better. So my question is just as we look ahead, how should we think about the dynamic of on- versus off-premise for Q2 and maybe through the balance of the year?

And then maybe just building on that, the takeaway data has been very impressive in the U.S. And I think it would be helpful to get your view on what was kind of consumer stocking up pantry load versus maybe what could be more permanent as a channel shift with bars and restaurants closed?

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [12]

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Your question is worldwide or focusing on the U.S.?

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Peter K. Grom, JP Morgan Chase & Co, Research Division - Analyst [13]

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Yes. I mean this was probably more directed at the U.S., but if you have views, I would love to get the view on all the geographies if possible.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [14]

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I mean the -- worldwide, every country behaves differently. Mexico, the problem in Mexico is that on-premise is closed, but also a lot of states are closing -- prohibiting the sale of alcohol. So then it's even worse than probably any country.

And in the U.S., maybe Mike and Steve could add up more there. But our U.S. numbers are great, I believe, and that's part because, well, we have great brands that are leaders, and that's what consumers are buying now, like leading brands that they trust. Our brands -- some of our brands are more focused on -- the majority of our brands in the U.S. are more focused on the off-trade. But maybe Mike can -- Steve can add to that.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [15]

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Yes. This is Mike Keyes. I think there's a lot of things going on. We hear a lot about pantry load. I don't know that, that is as accurate as it seems. People tend to look a lot at Nielsen and NABCA data. And obviously, that shows big increases across the board for most major suppliers. But with 0 business basically being done, as you spoke about in the on-premise, I don't know that there's a lot of pantry loading, and I don't know that there is more consumption. I think the consumption has just shifted, obviously, from the on-premise to the off-premise.

And as I said in my opening comments, we are uniquely positioned in that we have a very large successful RTD business in the margarita category. And that business is all off-premise. And so it insulates us a little bit from what's going on in the on-premise. The on-premise will -- it already is beginning to open up in some states across the United States. But I think it's going to be a very, very slow and deliberate opening. I think consumers are going to be guarded. And I think that you'll continue to see a lot of home consumption, a lot of, as Juan said, big, familiar brands that are easily mixable and easily prepared at home.

And Steve, I don't know if you have anything you'd like to add.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [16]

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Yes. I think the one thing that I would add is that Nielsen does represent only 25%, or I guess maybe during these times, maybe up to 30% of our depletion business. So I think when you look at those weekly Nielsens, there was one spike around March 21 where you saw an inordinate amount of volume compared to the other weeks that surrounded it. So I think that might have been your pantry loading. But since then, I think it's really just replenishment. And I think those consumers who were going on-premise and ordering a different drink week-to-week had to fill their liquor cabinet with maybe some different spirits. So I think we're enjoying some of that as well as I think it's indexed very high for us in those stores that are reporting to Nielsen, which tend to be the more big box retailers, where I think they're picking up a majority of the shopping right now.

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Peter K. Grom, JP Morgan Chase & Co, Research Division - Analyst [17]

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Okay. That's very helpful. And I just -- maybe a bit of a longer-term question, and it could be too early. But a theme that keeps coming up on earnings calls over the past month is just consumers going back to trusted brands and retailers focusing more on these big brands. And you kind of mentioned that in your prepared remarks. But over the past few years, clearly, tequila has seen a fair amount of new entrants. And so it would be helpful to get your view on how you see that evolving as we move through the balance of the year and maybe longer term.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [18]

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Yes. I think we're going to have to wait and see how quickly we return to whatever a new normal is. The biggest thing I would say -- the best description I have heard was from our sales director who told me early on, he said the difference now is that consumers aren't shopping, they're buying. And if you look at the -- even the -- we talked about the off-premise being open, but the off-premise isn't open in the way that it was open pre-coronavirus. You have -- the state of Pennsylvania had shut down until recently. You had some other control states that cut back on the number of their stores, people cut back on the hours of operation.

But the biggest thing from a shopping standpoint is consumers are uncomfortable being in places that are not their homes. And so as they go into the off-premise, sometimes they'll go in one at a time or 5 at a time, depending on the size of the store, they're not shopping. They're in there. They're buying. I think that's part of the reason that big 175 familiar brands are doing better than discovery brands. And we're going to have to wait and see how that shakes out over time.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [19]

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Yes. One additional thing, Peter. I think when you look at tequila as a percentage of spirits, just over the last 4 weeks, ticked up just slightly ahead as far as picking up their share of spirits. I think tequila and cocktails just moved up slightly. But that share has remained pretty constant if you look at the 13 week.

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Operator [20]

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The next question is from the line of Miguel Tortolero with GBM.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [21]

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The question is on Mexico. First, thanks for the color regarding volumes, excluding the B:oost issue. In this same regard, could you elaborate a bit more on this volume decline? Could you say it is fully explained by the on-premise channel? And related to one previous question, how has it evolved towards the start of the second quarter, especially in Mexico?

And the second one is more of a general question. Taking Europe as a precedent, given that lockdown measures have started before and probably the reactivation of the economy is going to be sooner at least than Mexico, what are the trends that you have seen in terms of volume in all these stages of the process? Is there some point of sales closing, the complete lockdown and probably some early signs of a potential evacuation soon? And more importantly, what is it that you can learn from there to probably bring it into other territories to try to mitigate a potential slowdown?

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & Latam [22]

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Okay. This is Luis Felix. Thank you, Miguel. In the case of Mexico, the volumes declined, putting aside the B:oost effect that we just explained. It was coming basically from the wholesaler channel. Wholesaler, as you know, is the one that serves the on-premise. And we have seen since the -- in February, they were very cautious because they knew that COVID-19 was coming, and they were very cautious to ship and to sell to the on-premise. And on-premise started to close. So basically, the decline in our brands were coming in the wholesaler channel.

Then the off-trade -- the other channel, the self-service, they were -- when -- in March, when this started, people were basically buying groceries and they were buying medical stuff and cleaning products and not alcohol. So we have seen the effect in both sides, in the wholesaler and in the self-service.

And you also mentioned what -- how is the start of the second quarter. It's been tough. As Juan Domingo mentioned, we are basically -- 5 states are declaring prohibition in terms of selling alcohol in their states and many municipalities basically prohibiting selling over the weekends or have signed restrictions. So we continue to see the wholesaler channel in -- starting in the second quarter to see difficulties because now they're facing the problem and some of them are closed. And also the ones that have stores, they have seen less rotation in their stores. So we see a very challenging second quarter as well.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [23]

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Okay. And the second question is just regarding what is the value that you can learn from there, bring it to the other territories, given that lockdown measures and all that have started before than the other regions?

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [24]

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I'm sorry, Miguel, we're having a tough time hearing your question. Can you restate it, please?

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [25]

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Sure. Yes. Just taking Europe as a precedent, given that lockdown started before and probably the reactivation of economies is going to be sooner, the question is, what is it that you can learn from those territories to do it to the other ones to try to mitigate a potential slowdown that probably have a lag compared to Europe?

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Gordon Dron, Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific [26]

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Do you want me to take that one, Fernando? This is Gordon Dron speaking. What we've seen around Europe, of course, varies by market because the mix of on-premise and off-premise in markets is different. But what we have seen in the markets that are strongly on-premise, Italy is a good example, we've seen the move of consumption away from the on-trade, which is now closed, into the off-trade. What we have been doing with our investments is rescheduling investments to focus more activity to the off-trade.

One of the things we have to look at is distribution because we have to ensure we have broader distribution in the off-trade for brands that perhaps are more traditionally on-premise focused. And we are also looking at how we can drive activity in the major retailers that is easily implemented because social distancing measures, even if the virus goes away -- sorry, doesn't go away but become less impactful and people are allowed to move around, social distancing is very likely to be continuing as an issue for the rest of this year. So we need to make the activities that we put in place in retail as easy as possible for the retailers to implement. So providing prepacked pallets, which have got the promotions on them, so that there is no handling required in outlet is one of the areas we're looking at.

To manage the downturn in on-trade consumption, we're also looking at how we take up online activity where we're putting drink suggestions to consumers that they can simply make at home. We have a specific Cuervo activity called Cuervo Squeeze, which we've been using extensively in Europe now, and we've been trialing it actually for a while and now rolling it out, which is a very simple Cuervo long drink, which brings refreshment, which is a critical component for homes. So it does require us to make some changes in behavior. We need to be ready for when the on-trade does start to open. And indeed, the Spanish this week, as of 2 days ago, have announced a provisional plan of how they intend the on-trade to reopen between now and the end of June. But that, of course, is subject to the continued control of the virus.

But where that happens, it's our job to ensure that we reestablish the distribution of our brands in these outlets, which have been closed for a long time. So it's important to get calls with the key outlets to get activation in place and ensure we have promotions ready for the consumers as they start to slowly go back to these outlets.

Because what we're already seeing from China is that, where the on-trade has been open now for a good 4 weeks, the uptake in the on-trade is still relatively low, perhaps penetration levels are only around 30%. And so activation to get consumers and entice consumers back will be very important.

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Operator [27]

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Our next question is from the line of Fernando Olvera with Bank of America.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [28]

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I also call on Juan Domingo, that you're fine. My question is regarding [health,] the [existing] environment. I want to ask, how should we think about [marketing] and the timing and promotion expenses going forward? Meaning, how much can we [stop] such expenses given this environment?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [29]

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Fernando, can you restate the question? We're really having a hard time.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [30]

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Yes, sure. I was wondering if you can share, I mean, given the uncertain environment, how much can you cut your expenses of marketing, advertising and promotion in coming quarters, and just to mitigate, I mean any weakness on top line, on [balance sheet]?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [31]

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Thank you, Fernando. Regarding AMP and potential optimization of AMP, we do have some levers, various levers to optimize AMP spend. The first quarter print is slightly above what should be the yearly average. And yes, we are constantly reviewing AMP, how can we optimize it and how will we manage it in the rest of the year. So yes, we're very on top of that, and we'll be active in optimizing AMP and see how the markets respond based on the developing business situation and how markets gradually open up.

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Operator [32]

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The next question is from the line of Felipe Ucros with Scotiabank.

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Felipe Ucros Nunez, Scotiabank Global Banking and Markets, Research Division - Analyst [33]

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Juan Domingo, happy you're feeling better, I second those thoughts from the rest of the analysts. So a couple of questions on my end. The first one is about agave prices. Is this in some way a blessing in disguise? Do you feel that maybe this will be a time where the small producers that have come up over the last few years maybe don't have the financial muscle to survive and that may cause some demand to exit the market and hopefully relax things a little bit on the agave price side?

And then the next one, the next question I had was on Mexico. In kind of forgetting a little bit about this period of COVID and going further ahead into what might look like a recessionary period that will go beyond this year. We don't have the historical data exactly on how consumption of tequila behaved in previous economic crisis. But I was hoping you could give us an idea of how you expect volumes to behave in a period of recession. Typically, we think of alcohol being kind of countercyclical, but every category is different. So just thinking of how you think about the category in a recessionary environment.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [34]

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Regarding agave, we haven't seen anything happening because production is still happening. Everyone is still producing at its -- like if nothing had happened, so we don't know if there's going to be some, as I said, any disruption in the agave supply or even changes in prices. So far, we haven't seen anything.

And regarding -- what will happen regarding tequila in Mexico, it's hard. I don't think it's just tequila. I think the economy in Mexico is kind of slowing down very fast. So I think people will have less money in their pockets and I'm not sure that -- we haven't seen this happening at any level because you have all this on-premise closing. I mean really, when it opens, we don't know exactly when our people going to be coming back. So it's hard to predict. But you know exactly that it's going to be difficult for the Mexican economy. So I'm not sure that they will continue buying with confidence as they did before this happening.

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & Latam [35]

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And just to comment, this is Luis Felix. We have seen that tequila -- in the last 5 years, tequila has been gaining share in the whole industry. Tequila has moved to get to 40% of the total industry from 35% in 3 years. So tequila before the COVID was gaining share and was very, very strong in the Mexican market. I think the real challenge now is that because of the price increases that we have taken, the whole industry in tequila has taken pricing very aggressively. That is the only difference versus the last recession that we had in 2009. So with the new prices, yes, there will be a challenging environment to continue on that premium pricing. But I think tequila is well positioned in Mexico.

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Operator [36]

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Thank you. At this time, we've reached the end of our question-and-answer session. And I will turn the floor back to Juan Domingo for closing remarks.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [37]

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I would like to thank you again for your continued interest in Becle. We remain extremely confident in our family of brands and our prospects for long-term growth and hope that everyone stays safe and healthy. Have a good day.

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Operator [38]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.