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Edited Transcript of CUERVO.MX earnings conference call or presentation 28-Feb-20 2:30pm GMT

Q4 2019 Becle SAB de CV Earnings Call

Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Becle SAB de CV earnings conference call or presentation Friday, February 28, 2020 at 2:30:00pm 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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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Antonio Gonzalez Anaya

Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research

* Benjamin M. Theurer

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

* 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

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Presentation

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Operator [1]

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Good morning, and thank you for joining Becle's fourth 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 other 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 on the line now.

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

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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 fourth quarter ended December 31, 2019 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 Sprits; Steve Shanley, Senior VP of Commercial Strategy for Proximo Spirits; Luis Felix, Managing Director of Mexico and LatAm; Gordon Dron, Managing Director of EMEA and APAC regions; and Mr. Fernando Suarez, Chief Financial Officer. 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 fourth quarter of 2019 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 pass the call on to Mr. Juan Domingo Beckmann, CEO of Becle.

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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. Thank you for joining us today to discuss Becle's fourth quarter results. I will make some opening comments, and then I will ask Mike Keyes to discuss performance of our U.S. and Canada business; Luis Felix will review our Mexico and LatAm results; and Gordon Dron will discuss our results in the EMEA and APAC regions. Fernando Suarez will then walk you through our financial results. Becle finished 2019 with strong underlying volume and net sales growth during the fourth quarter, driven by consistent solid performance in the U.S., Canada and Mexico regions, while the Rest of the World region was relatively in line with the prior year.

For the full year 2019, the company delivered 8% underlying volume growth, achieving our 2019 stated guidance and net sales growth of 9%. We continue to see favorable depletion trends across our global footprint, led by strong performance of our tequila portfolio. While agave pricing continues to be a challenge, given the strong demand of tequila remaining a pressure in our gross margin. We are proactively taking actions in our agave supply strategy, focusing on long-term value creation. We continue to see demand in supply agave imbalances, keeping prices high for the foreseeable future. We expect gross margin erosion to probably continue in the interim -- I'm sorry, in the interim, we are stepping up our plantation efforts, and we understand so is the industry. We are aggressively negotiating our agave procurement sourcing, focusing on price and ultimately sugar content.

As a result of our increased input cost in our tequila products, we will monitor and test where we can take price action across our regions, as we have already done in certain markets. Our performance continues to outpace the broader Spirits industry, reflecting our attractive portfolio of brands and favorable positioning in key growth categories. We remain well positioned in the global Spirits industry with a leading portfolio of brands in high growth categories and a healthy financial position. For this year, we expect a solid volume growth, similar to what we observed in 2019, as Fernando will elaborate on specific guidance later on.

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 were pleased with our commercial performance in the United States and Canada during the fourth quarter of 2019. Consumer takeaway for our brands in the United States, as measured by Nielsen data, grew over the last 3 months of 2019 by 7.3%, outpacing all major multi-branded distributors in the country. Depletions were up 2% for the quarter and were up 5% for the full year. Tequila was up 4% for the quarter and was up 7% for the full year, driven by continued strength in our offerings of super premium tequilas. Our ready-to-drink margarita category performance was solid, with 9% growth during the fourth quarter to post 6% growth for the full year. We continue to face competition from alternative flavored cocktails, but we have found success by extending the flavor offerings of our ready-to-drink products.

Our fourth quarter depletions were influenced by a change in the way that our depletions are recognized by our California distributor, which has been under new management since an August 2019 joint venture transaction. This change in policy had no impact on our shipment volumes. Without this change in policy, our depletions for the fourth quarter would have been up 5%. Strong consumer takeaway and depletions growth during the quarter continued to reinforce the shipment trends. We recognized 8% underlying growth in shipments for the quarter compared to the prior year and finished up 8% on an underlying full year basis. Fourth quarter shipments outpaced depletions by the expected amounts as distributors prepare for the holiday peak selling season with distributor inventories finishing consistent with last year. Underlying net sales value in the United States and Canada were up 2% during the quarter and finished up 8% for the year. Our underlying net sales value growth in 2019 continued to outpace volume performance on a full year basis.

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

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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 strong quarter in Mexico, with fourth quarter underlying volume and sales increasing 6% and 17%, respectively. Growth was again fueled by our tequila portfolio, which increased 9% in volume and 24% in net sales value. As we discussed last quarter, in September, we took a price increase to offset higher input costs, which favorable -- impacted the net sales. Additionally, we have just announced another price increase in this month. Pricing was again taken across the tequila market in Mexico. Industry sales in Mexico continue to remain soft during the fourth quarter, remaining relatively consistent with the prior year as a result of the current economic conditions.

However, we're very pleased with our performance relatively to the broader industry and our ability to maintain our strong market share performance in the tequila category. We expect this trend to continue into 2020. In Latin America, volume was relatively flat with the year ago period and was in line with our plan. We continue to focus on adding premium brands across the region, in line with our premiumization strategy. Overall, we had a strong fourth quarter and are pleased with our performance in 2019 in both Mexico and Latin America.

I'll now turn the call over to Gordon Dron, Managing Director of our EMEA and APAC region.

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

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Gordon? Gordon? Why don't you start with number, please.

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

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Okay. I will...

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Gordon Dron, Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific [8]

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Sorry, I've got it. Sorry, I beg your pardon. So good afternoon from Europe. The EMEA and APAC region delivered shipments just ahead of last year and contributing to a strong second half of 2019, where shipments were up mid-single-digit year-on-year. And on a full year basis, the region also recorded mid-single-digit growth. Net sales value growth tracked slightly behind volume driven mainly by market mix. Tequila volumes grew mid-single digit over the year and during the second half, but less quickly during the fourth quarter. Net sales value grew ahead of volume, recording high single-digit growth, reflecting the tequila price increases put through in the second half of 2019. Year-on-year, end market depletions grew high single digits, leaving well balanced end market stock positioners.

Across EMEA, after a strong third quarter, shipments were slightly slower in the fourth quarter. But on a full year basis, shipments continued to grow at mid-single digits. These were reflected by similar levels of depletion growth. The Asia Pacific region had an exceptional year with shipments for the fourth quarter and the full year growing at double-digit rates. Depletions also grew to high single digits, supporting the growth trajectory. As in EMEA, price increases have been taken in key markets over the year, notably on tequila. We are closely monitoring the coronavirus situation in our APAC markets and any potential impact on demand.

Currently, significantly impacted markets represent around 2% of total net sales. Supply chain worldwide are facing disruption, and despite this, we have not experienced any material impact on our own supply chain. We are monitoring the situation on a daily basis and proactively taking actions to secure availability for critical supplies throughout the year. We are pleased with the overall performance for the year and remain confident about our brands moving into 2020.

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

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [9]

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Thank you, and good morning, everyone. Let me walk you through the fourth quarter financial results. During the fourth quarter, the company reported on a pro forma basis or underlying 5% increase in consolidated net sales to MXN 10.4 billion. This pro forma or underlying growth adjusts for the nonrenewal of the distribution agreement for the Cholula hot sauce brand during April of 2019. During the fourth quarter, gross profit decreased 8.3% to MXN 5.3 billion, and gross margin decreased to 50.9% from 56.4% in the fourth quarter of 2018.

For the full year, gross margin was 52.7%. The year-over-year gross margin decrease continues to reflect increasing third-party agave costs and, to a lesser degree, the Mexican peso appreciation against the U.S. dollar, impacting our net sales. As mentioned earlier, we expect these agave cost pressures to continue to be a drag on gross margins for the foreseeable future, with no year-on-year gross margin improvement in the short term. AMP expenses as a percentage of net sales, decreased to 20.7% from 24.6% in the fourth quarter of 2018. This decrease reflects the planned timing of AMP spend relative to the prior year period. Distribution expenses decreased 20.4% to MXN 344 million, mainly driven by lower fuel costs. As a percentage of net sales, distribution decreased to 3.3% from 4.2% in 2018.

SG&A expenses increased 8.5% during the fourth quarter, representing 7.7% of net sales compared to 7.2% in the fourth quarter of 2018. This was mainly driven by inflation across our regions, backfilling of strategic personnel positions and investments in our route-to-market structures. Operating income decreased 1.1%, as the operating margin decreased to 19.5% from 20.1% for the fourth quarter 2018. Fourth quarter EBITDA increased 1.6% year-over-year at MXN 2.2 billion, while EBITDA margin was 21.6%. For the full year, EBITDA margin was 20.5%. Net financial results were a gain of MXN 17 million during the fourth quarter of 2019, primarily driven by an exchange gain that was partially offset by net interest expense. Fourth quarter consolidated net income decreased 30.6% to MXN 1.4 billion, and net margin was 13.7% compared to 20.1% in the fourth quarter of 2018. For the full year, net margin was 12.5%.

Earnings per share were MXN 0.40 per share for the quarter and on MXN 1.04 per share for the full year. As of December 31, 2019, cash and cash equivalents were MXN 9.6 billion, and total debt was MXN 9.4 billion. We continue to maintain a strong balance sheet with conservative financial leverage and ample liquidity to execute our long-term growth strategy. Regarding growth guidance for the year, we expect to deliver full year mid-single-digit underlying volume growth. This annual volume growth will be stronger in the second half as we are cautious in the first half in certain regions, where we are executing price increases and/or facing slow macroeconomic growth conditions, such as the Mexico region. Specifically, in the first quarter, we expect flat underlying consolidated volume growth.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Benjamin Theurer.

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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 2 quick ones. So thanks, first of all, for the guidance on volume and the outlook here, and you've mentioned the -- most of that coming back-end loaded as you've been increasing prices. So you particularly mentioned Mexico, did you also work on price increases in the U.S., Canada? Or is that something you're currently not considering, and it's mainly in Mexico, where you've implemented price increases? That would be my first question.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [3]

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This is Mike Keyes. We have announced some price increases across the United States, and we will continue to have a consumer-led pricing strategy. We'll take price where we feel it's appropriate based on the brand health and the competitive landscape. So you'll likely see some pricing activity as the opportunity derives.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [4]

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Okay. Okay. Perfect. And then on the other things. So you've mentioned gross margins likely going to stay somewhere in that area in 2020 where it is right now. But clearly, despite the gross margin contraction, you were able to deliver flat EBITDA essentially on a full year basis as you've cut down on AMP. And if we just take a look at the full year, MXN 21.6 million for advertising. That's more or less the level we've seen in 2017, but it is below what we had, for example, in 2015, '16 and '18. So what is going to be the new normal in terms of AMP as a percentage of sales or in absolute peso terms? So just that we get a little bit of an understanding how you think about your marketing budget throughout the year.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [5]

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We will continue in the '20s but we are spending much higher on key strategic brands. So basically, that's what we're doing. We are focusing on brands that we'll believe -- that we believe that will grow faster, and that give us more margin.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [6]

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Okay. So somewhere flat on a year-over-year basis as well? That fair to say?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [7]

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Correct.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [8]

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Congrats on the results.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [9]

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Thank you, Benjamin.

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Operator [10]

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Our next question comes from the line of Fernando Olvera.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [11]

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My first question is related to volumes. I mean basically, regarding tequila. I don't know if you can give us some color about the performance in between your mainstream and super premium brands. And also within tequila, can you comment how much tequila 100% represented from your volume and sales in 2019? And how it compares versus 2018? That's my first question.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [12]

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Yes. So this is Mike again. From a U.S. Canada perspective, our sales across all of our tequilas were outstanding in 2019. We showed great success with us Jose Cuervo Especial, and we are growing the majority of our other tequila products. So I turn it over to Steve, maybe you asked for a percentage.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [13]

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Yes. The 100% are pretty much in the neighborhood of mid-30%, 35% of our total tequila business and are growing very nicely, actually outpacing the Especial growth.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [14]

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The Especial growth would be in the mid-single digits.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [15]

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In the case of Mexico, 100% agave tequilas represents about 75% of our volume.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [16]

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Okay. So overall, it says that tequila 100% continue to gain market -- yes, market share versus mixed tequila, right? Across the board.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [17]

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Yes.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [18]

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Okay. Great. Perfect. My second question is regarding pricing. Given the strong pricing that we have seen in Mexico in 2019 and considering the economic weakness, can you comment -- I mean if you still see room for further price increases this year. I mean concerning that you already raised prices this month. I mean if we can expect further price increases throughout the year? And I mean, if you can share more details about your strategy that will be very helpful. Also, if you can comment what's an average, the price increase that you implemented this month. It will be very helpful.

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & Latam [19]

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Okay. This is Luis. The -- yes, we took a price increase announced to implement in mid-February. The percentage of the increase in our tequila was between 5% to 7% increase, which is aggressive, but we also saw that some other companies announced price increases around that percentage. Yes, we remain cautious because, as you mentioned, the consumer environment and the slowdown of the economy, it's -- it will be difficult to continue to take price increases at the level that we have been taking. So I think the response to the price increase so far, it still was accepted and it was implemented so far in all the retailers. So yes, we're going to remain cautious for the next semester.

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Operator [20]

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Our next question comes from the line of Andrea Teixeira.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [21]

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Just want to kind of clarify a little bit of the prepared remarks when you talked about the integration of agave. I think I've heard that you said the plantation is going to step off of some plantation efforts. Is that -- you're saying like you -- I know the visibility was impaired in the past. And you no longer gave guidance as you had before from '60 to '90 in -- at the IPO in the near future. But then, what should we think about like in terms of when you said margins should continue to be under pressure? Can they go even worse at this point? Because you're getting more pressures and more inflation. So help us understand how -- what is your visibility? And what is your integration as we speak?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [22]

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Yes, Andrea, this is Fernando. Regarding margin pressure, yes, we have been very vocal that we expect to see continued pressure from high agave prices. So our expectation is that, that should be a drag on margins. We do not see a margin inflection at this stage. And regarding plantation, as mentioned in the scripted remarks, we have stepped up plantation substantially. And we understand, so has the industry. Specifically, on integration, as you all well know, we do not disclose that information for competitive reasons. So that's what we would be able to comment at this stage.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [23]

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Okay. So you're saying that, that such -- Fernando just to understand. So is it still moving in the right direction? It stepped back, obviously, went down because you're cutting plants younger plants, as everybody else in the industry went down from the level you were before, like the 60%, you're not disclosing how much it went down to? Now you're coming back to that, but you're not -- but you're still going to be a long way into getting to a comfortable position. But the other question, and correct me if I'm wrong, and then the other follow-up on that is that what is your visibility into that outcome, I mean, into the pricing? Do you have enough visibility on -- I remember, like you said before, you're doing long-term contracts on the third-party agave. So you have visibility until the end of this year? Or not fully?

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

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We have visibility in some of the agave that we are buying, but that's not 100% of that -- our agave needs. So for us, it's very complicated to see when these increases are going to stop. So that's why we kind of stopped trying to predict what's going to happen. So far, it hasn't -- the price increases haven't stopped. So...

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [25]

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And then, the one is...

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [26]

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The growth of 100% agave is still very high. So that's -- let's say that's keeping the prices high.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [27]

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Right. And then one other question on the distributing in California and the change. Because I think you mentioned if you were to normalize that -- the U.S., I just want to see if I understood correctly, you would have grown depletions by 5%? Or is that the number that I should be using?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [28]

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The -- we had kept the same depletion recording between old and new distributor, we would have grown 5%, correct.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [29]

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Right. And then you -- and then that would be the run rate that you're seeing now into -- I think that makes sense with what we see in Nielsen in the U.S. So that's the run rate that you're seeing for 2020 up until now?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [30]

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Yes. Andrea, but just to clarify, 5% for the fourth quarter, and it would have been 6% for the full year, which is pretty much on par with what we've been recording probably since the second quarter of 2018.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [31]

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Right. And that's for U.S. and Canada. That's helpful. That's where there was in Canada, right?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [32]

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Yes.

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Operator [33]

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(Operator Instructions) Our next question comes from the line of Miguel Tortolero.

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [34]

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And following up on the previous comments you made on pricing. And having in mind the U.S. experience, there has been a couple of years since the price increase took place. And with these days agave prices have to continued to price per sold. So would you say that an additional price increase in this region, specifically in the Cuervo Especial brand, which is the largest, is a possibility or it isn't even on the table? And the second one, also probably related to your previous comments on mix, we saw a strong growth in the Cuervo Especial brand during the quarter that, I guess, is mainly coming from the U.S.. Could you comment, in general terms the mixed dynamics you're seeing in this region?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [35]

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Could you repeat the second part of the question regarding our RNDCs?

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [36]

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No. No, the -- on the U.S., if you comment on the mix dynamics you're seeing here? That's the second question.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [37]

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Yes. So for the first question, as we said earlier, we'll continue to pursue a consumer-led pricing strategy, we do believe we have some opportunity on Jose Cuervo Especial in certain markets, and we will test that going forward.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [38]

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The second point.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [39]

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As far as the mix of tequila, I think what you're asking is, was the U.S. Jose Cuervo Especial the main driver of the total Especial business?

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Miguel Angel Tortolero, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [40]

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Yes, just in general, what's the categories that you have been grown the most in this region, as we saw a strong growth from the Cuervo Especial brand during the quarter.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [41]

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Yes. So Especial is growing, and it's growing pretty consistently. And as it makes up 70% of our tequila number, you can do the math and get through a number as to what Especial is growing. But outpacing that is 100% agaves. All of our 100% agaves for the fourth quarter would have outpaced a Especial.

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Operator [42]

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Our next question comes from the line of Antonio Gonzalez.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [43]

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I just wanted to, first, follow-up on the cost debate. I wanted to -- I understand there's no guidance, so feel free to please -- do not make any forward-looking comments. But just -- I'm trying to understand the fourth quarter number, right? And obviously, when I look at the 3Q to 4Q progression, there is nearly a 300 basis points compression, right? So I wanted to reconcile that with the increase that we're seeing in your inventories, right? I mean both short-term and long-term inventories are increasing. I think that by the end of the year, 26% and 13%, respectively.

So I guess the question is, when you look at the number sequentially, are you surprised of these compression? Or what exactly does your inventory color, right? I mean I presume a portion of it, perhaps, has to do with whiskey and some of the other products that have aging requirements, but I just want to reconcile, if the inventories are increasing so sharply, do you -- irrespective of the guidance that you might share with the market, do you have visibility already? Or is there some other reason why you are still surprised about the gross margin volatility on a quarter-by-quarter basis?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [44]

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Thank you, Antonio, for the question. First is we're not surprised about this sequential cost behavior. We have been vocal throughout -- previous to the quarter that we expect the cost pressures to continue. And regarding inventories, specifically, on the short-term side, the increase that we see is primarily driven in first place by raw materials and then followed by finished goods. And this sets us up for the 2020 calendar year, what we expect to perform from the business in terms of sales and moving the product. The movement in long-term inventory is primarily related to agave. So that's what we would be able to comment regarding the inventories and the cost.

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Antonio Gonzalez Anaya, Crédit Suisse AG, Research Division - Senior Analyst of Latin American Equity Research [45]

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Okay. Fernando, and just secondly, very quickly, I wanted to ask if you can comment on Traditional in the U.S., I understand you have a very successful case study of Mexico of trading people from the Especial family to the Traditional family. And I wanted to ask if you're making any inroads in the U.S. already that are sizable or comparable to the Mexican experience?

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [46]

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Yes. This is Steve Shanley. The -- traditionally, we've had reasonable success with it. It is one of our top performers, if you look at the fourth quarter, it grew faster than any other brand during the fourth quarter over the prior year. And on a year-to-date basis, it was right at the top. So we've had tremendous success following the ad campaign that we focused on Tradicional. Currently though, it still represents a mid-single-digit percentage of our total tequila business.

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Operator [47]

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And there are no further questions at this time. I'd like to turn the call back over to Juan Domingo for some closing remarks.

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Juan Domingo Beckmann Legorreta, Becle, S.A.B. de C.V. - CEO, GM & Director [48]

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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. Have a great day.

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Operator [49]

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This concludes today's conference call. You may now disconnect.