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Edited Transcript of CUERVO.MX earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Becle SAB de CV Earnings Call

Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Becle SAB de CV earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm 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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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* 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

* Luis Miranda Valenzuela

Santander Investment Securities Inc., Research Division - Head of Food and Beverage

* 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 Third 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, goal, 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.

At this time, I would like to turn the call over to Ms. Mariana Rojo.

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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 Officer. Thank you for joining us to discuss the unaudited financial results for the third quarter ended September 30, 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 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; and Fernando Suárez, 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 third 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 Third 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 unit. Luis Felix will review our Mexico and Latin American results and Gordon Dron will discuss our results in EMEA and APAC regions. Fernando Suárez will then walk you through our financial results.

During the third quarter, we reported a 3.3% volume increase; and on an underlying basis, our volume growth was 6.8%, driven by growth across each of our regional categories. Our net sales increased 9.6% as reported or 12.5% on an underlying basis.

We are pleased with our performance for both the third quarter and the first 9 months of 2019, which continues to exceed the broader spirits industry, benefiting from the strength of our brands and our focus on fast-growing spirits categories. This increase in both volumes and net sales reflects positive depletion trends across our global footprint and brand portfolio, led by the continued strong growth of super-premium tequila. We remain on track to achieve our mid- single-digit volume guidance for the full year. We are the fastest-growing multi-brand spirits company in the U.S., according to consumer takeaway public figures.

We generated strong growth in net income during the third quarter, reflecting our net sales increase, while continuing to take the appropriate measures to navigate the pressures of agave pricing. We remain committed to our agave supply strategy. As a whole, agave industry supply situation remains challenging. We expect the cost pressures to continue.

We remain well positioned in the global spirits industry with our leading portfolio of strong brands in high-growth categories. Continuing with our efforts to constantly improve our operational efficiency, I would like to welcome Maurício Giordano Ferreira to the company as Global Operations and Supply Chain Director. We are confident that his broad international experience in these fronts will bring added value to Becle. Maurício has the global experience and leadership capabilities to face the challenges this dynamic industry constantly possess.

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 third quarter of 2019. Consumer takeaway for our brand in the United States as measured by Nielsen and NABCA grew over the past 3 months by 9%, outpacing all multi-branded suppliers in the industry. Depletions were up 7% for the quarter and are now up 6% year-to-date. Tequila was up 9% for the quarter and is up 8% year-to-date, driven by continued strength in our offerings of super-premium tequilas, consistent with current trends. Our ready-to-drink Margarita category, the performance recovered from a soft second quarter and gained 8% during the third quarter, post 6% year-to-date growth through September.

We continued to face competition from alternative flavored cocktails, but we found success by focusing on our core business and by extending our flavor offerings in our 200 milliliter ready-to-drink Margaritas, to capitalize on this trend towards convenience. Strong consumer takeaway and depletions increased during the third quarter and continued to reinforce the shipment trends.

We recognized 8% growth in shipments for the quarter compared to the prior year and were also up 8% year-to-date. Third quarter shipments improvement was in line with depletion growth as inventory remained relatively consistent throughout the quarter. Net sales in the United States and Canada were up 10% during the quarter and now up 10% for the year. Our net sales value growth in 2019 continues to outpace volume performance year-to-date by more than 2%, largely driven by our ongoing premiumization strategy.

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. During the third quarter, volume and sales in Mexico increased 3% and 15%, respectively. These trends during the third quarter were steeled by the growth of our tequila portfolio, including our premium brands. Favorable sales mix as well as the effect of a price increase earlier in 2019 contributed to the strong net sales.

In mid-September, we took an additional price increase to offset higher input costs. Pricing was also taken across the tequila industry in Mexico. Industry sales in Mexico continue to remain soft, increasing approximately 1% as a result of current economic conditions, particularly in the wholesaler channel. However, we continued to generate higher market share in both the tequila category and the spirits industry as a whole on a year-to-date basis. We expect these industry trends to continue in the near term.

In Latin America, we experienced a recovery for the quarter. During the third quarter, volume and sales increased double digits, reflecting good growth across important Latin American markets and favorable trends in the sales mix. We are introducing proven brands to the region, particularly to our tequila portfolio, favoring our premiumization strategy worldwide. Overall, we had a positive third quarter in both Mexico and Latin America.

I will now turn the call over to Gordon Dron, Managing Director for EMEA and APAC regions.

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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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And good afternoon from Europe. And thank you, Luis. The EMEA and APAC region had a strong third quarter, recording a double-digit growth in performance and tequila shipments. Year-to-date shipments across the region are now ahead of last year, with net sales showing high single-digit growth compared to last year.

Across EMEA, shipments have made stronger recovery in the third quarter, registering high double-digit growth over the prior year and are now up mid-single digits for year-to-date. Depletions year-to-date are running positively in all categories, with tequila improving performance after the price increases taken during the second quarter. Whiskey shipments remain positive across EMEA and other brands continue to develop strongly within the region.

In APAC, shipments to the end of the third quarter are running strongly ahead of last year, showing double-digit increases and contributed significantly to the rest of the world's regional volume. Depletions, overall, are showing mid-single-digit increases. Traction for our Irish whiskey sales in the region continue, with an encouraging performance in Australia. Additionally, our rum offerings continued with strong double-digit growth on shipments and depletions across both regions.

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 third quarter financial results.

During the third quarter, the company reported 9.6% increase in consolidated net sales to MXN 7 billion. On a pro forma or underlying basis, net sales increased 12.5% over the prior year. This pro forma or underlying growth adjusts for the nonrenewal of the distribution agreement for the Cholula Hot Sauce brand during April of this year and is partially offset by adjusting for the delay in billing discounts from a large distributor that occurred during the second quarter of 2018, which reversed during the third quarter of last year. This growth, on a pro forma basis, reflects 10% net sales increase in the U.S. and Canada, 15% net sales growth in Mexico and 19.7% in the Rest of World. Total volume increased 3.3% or 6.8% on a pro forma basis. The pro forma volume growth was driven by 8.4% growth in the U.S. and Canada, 2.8% improvement in Mexico and 11.4% increase in the Rest of World.

During the third quarter, gross profit increased 12.0% to MXN 3.8 billion, and gross margin increased to 53.6% from 52.5% for the third quarter of 2018. While gross margin increased on a year-over-year basis for the quarter, as mentioned earlier we continue to be impacted by high input costs, and we expect cost pressures to continue. AMP expenses as a percentage of net sales decreased to 22.8% from 23.5% in the third quarter of 2018. This decrease reflects the planned timing of AMP spend relative to the prior year period. SG&A expenses increased 3.6% during the third quarter, in line with customary inflation trends and representing 10.4% of net sales compared to 11% in the third quarter of 2018.

Operating profit increased 31.8%, while the operating margin increased to 16.2% from 13.5% in the third quarter of 2018, primarily reflecting the increase in gross margin, planned timing of AMP spend relative to the prior year period and a decrease in distribution expenses, mainly driven by lower fuel costs. EBITDA increased 31.5% to MXN 1.3 billion, with the EBITDA margin increasing to 18.5% from 15.4% in the third quarter of 2018. Net financial results this quarter decreased 52.5% to MXN 155 million, mainly driven by lower net foreign exchange loss compared to the same period of last year.

Third quarter consolidated net income increased 91% to MXN 728 million, and the net margin was 10.4% compared to 5.9% in the third quarter of 2018. Earnings per share were MXN 0.20 versus MXN 0.11 in the same period of last year. As of September 30, 2019, cash and cash equivalents were MXN 8.7 billion, and total debt was MXN 9.9 billion. We continue to maintain a strong balance sheet with conservative financial leverage and ample liquidity to execute our long-term growth strategy. In summary, we would like to reiterate our full year volume guidance for mid-single-digit growth.

Operator, we hand it back to you for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Fernando Olvera.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [2]

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I have 2 questions, if I may. The first one is, I mean, if you can give us an update about the agave prices and how they are performing? And what is your outlook for the next 12, 15 months? And also, if you can comment about your hedges on agave and how they can help the company to limit the cost pressure that you mentioned in the initial remarks in coming quarters? And my second question is if you can give us more color about the savings on distribution and if they will be recurring?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [3]

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Fernando, on agave prices, we continue to see pressure in agave prices. We have seen a marginal increase year-to-date on agave prices, and we expect cost pressures resulting from that to continue. On hedges, we don't have specific hedges on agave. What we do have is certain long-term contracts that we have secured to have access to agave supply. But overall, the agave situation remains challenging, as stated in the scripted remarks of the call.

Regarding distribution expense, the reduction in distribution expense is primarily driven by fuel costs and assuming fuel and energy costs in general remain where they are, we would expect a similar run rate cost for distribution.

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Fernando Olvera Espinosa de los Monteros, BofA Merrill Lynch, Research Division - Associate [4]

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Okay. But I mean, you mentioned in the case of distribution that you also had some savings. Are those savings come from the lower fuel costs? Or...

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [5]

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Yes, primarily, Fernando, they come from lower fuel costs.

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Operator [6]

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Your next 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 [7]

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I also have 2 very quick ones. So first of all, we've seen on the category performance, Jose Cuervo from a volume and a sales perspective being very strong. Can you elaborate a little bit on the competitive dynamics, particularly in the Jose Cuervo category, considering that the growth, actually, from a volume perspective was almost the highest except ready-to-drink, which was a little better? So that would be question number one.

And number two, within the same topic, other spirits, be it on volume and sales, has been somewhat lackluster. Can you give more details on which category within the other spirits? Is it vodka? Is it gin? Is it part of whiskey? What's basically offsetting some of the growth dynamics, when you talk about Irish whiskey doing well, because there must be something in other spirits that's just not doing well? Those would be my 2 questions.

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [8]

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Well, this is Mike Keyes. From a U.S. perspective, our Jose Cuervo business does continue to do very, very well. We have, I think, from a marketing standpoint, excellent advertising under the Cuervo banner of Father of Tequila, running in the market. It's in a very successful category right now, and it's just doing well.

With regard to what in our portfolio, what categories are doing well, I think all of our tequila brands are doing well. Our Irish whiskey categories we referenced is doing well. In the United States, our Kraken business is up. The only area I think that we struggle in right now a little bit is our vodka category.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [9]

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Okay. And that's the similar picture in most of the regions, if anyone could confirm that? Just to understand.

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Gordon Dron, Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific [10]

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This is Gordon Dron, speaking -- [why don't you go, Luis]?

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Luis Fernando Felix, Becle, S.A.B. de C.V. - General Director of Mexico & LatAm [11]

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Well in Mexico, what we have seen is the category remains basically stable. We're growing -- tequila growing significantly in Mexico and better than the rest of the categories. We are -- we're seeing brandy declining, and vodka is taking some additional growth because of the flavor bucket, which is becoming popular now in Mexico. But basically, not really changes in the category. Mezcal and gin with a very low base, but growing double digits. That's basically what's happening.

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Gordon Dron, Becle, S.A.B. de C.V. - MD of Europe, the Middle East & Africa & Asia Pacific [12]

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In the EMEA and APAC regions, we continue to see good growth, particularly in the Asia Pacific region for the Especial category. And we're also seeing, as I mentioned in the script, we had a more favorable competitive position where we are perhaps seeing less discounting from some of the other brands, which is therefore, in effect, improved pricing levels from some competition. So that has helped the category. Irish is continuing to grow very strongly, and rum's portfolio is performing very well as well.

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Benjamin M. Theurer, Barclays Bank PLC, Research Division - Head of the Mexico Equity Research & Director [13]

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Congrats on the results.

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

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Thank you, Benjamin.

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Operator [15]

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Your next question comes from the line of Andrea Teixeira.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [16]

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Congrats on the results. Two questions, please. One on the gross margin and another one on the shipments in the U.S., ahead in the fourth quarter. On the gross margin, you had a pretty sizable improvement in this quarter. And I know Fernando had mentioned agave continues to be elevated, and you had a sequential increase. So I was hoping to see if that -- to confirm if that is just easy comps because you had a lot of pressures on transportation, which part of it is, I'm assuming, it's part of COGS. And also with the increase, the price increase that you had in September, maybe kind of helped a little bit towards the end of the quarter. So I was hoping to see if you can elaborate more? And if you believe you can sustain those margin gains into the future?

And also, if you can comment on the second question is related to shipments in the U.S. I think we can get into the mid-single-digit volume growth, but you had a pretty sizable comp last year. Should we still be mindful of that? Or you still feel confident on your track channels' performance that you can still lap those comps?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [17]

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Andrea, thank you for questions. Regarding the margins, it is primarily related to NSV, is what is driving the improvement. In other words, on a per case basis, the improvement in NSV per case more than offset the cost pressure per case that we are observing. So it's basically top line driven. However, we do expect cost pressures to continue, given the agave situation that we've been elaborating upon and that's what we would care to say.

Regarding shipments, I'll pass the question to the U.S. team.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [18]

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Yes. Thanks, Fernando. Andrea, this is Steve Shanley. As far as the inventory goes and the shipments for the fourth quarter, we intend to finish the year with the distributor inventory that we finished last year with. And if you -- and additional information would be, we finished Q3 within 50,000 cases of where we finished Q3 from last year. So with those 2 pieces of information, I would say that whatever the depletion growth is for the fourth quarter, you'll have similar shipment growth that will correspond to that depletion growth.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [19]

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Yes, that's very helpful except I couldn't hear well when you said you were below how much in inventory as you entered -- as you exited the third quarter relative to last year?

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [20]

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Yes, within 50,000 cases.

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

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50,000. Okay. Really appreciate the color.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [22]

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No worries.

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Operator [23]

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Your 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 [24]

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Congrats on the results. The first one is regarding the U.S. We saw strong volume performance during the quarter in this division and also, there is a benefit coming from FX during this quarter, and I understand that the discount issue benefits top line during the quarter as well. But revenues only increased 10% compared to the close to 9% increase in volumes. So yes, could you make comments on the mix dynamics you're seeing this -- in this region?

And also, the second one is regarding AMP. Part of the EBITDA margin improvement during the quarter was explained by this reduction in AMP, which you mentioned on your press release as a timing versus last year. So could you elaborate a bit more on this topic and what should we expect going forward?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [25]

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Miguel, we want to make sure that we're getting your first question right regarding the mix on U.S. Can you reformulate 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 [26]

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Yes. The question is, with the volume increasing close to 9% and revenue is increasing around 10%. And you also have benefit from FX and I think a positive benefit from the discount issue over last year. So I just would like to understand the mix you're seeing here that is probably not allowing to grow sales a bit higher.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [27]

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Miguel, this is Steve Shanley again. The FX effect is somewhat minimal. I think the reversal of the discounts that would have impacted the previous year's comp, obviously, that discount then got recorded in the third quarter. So the net sales value per case would have been deflated, which would have made an easy comp. We beat the net sales value per case by about USD 1.60 and much of that would be related to those discounts.

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [28]

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And regarding your second question, Miguel, on AMP, it really reflects the timing of the AMP spend across the different regions.

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Steve Shanley, Becle, S.A.B. de C.V. - SVP of Commercial Strategy for Proximo Spirits [29]

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Yes. From a U.S. perspective, we had a heavy advertising schedule in the beginning of the year, so that's the only difference with the third quarter AMP.

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Operator [30]

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Your next question comes from the line of Luis Miranda.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [31]

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The first one is related to agave, a follow-up. You were -- Fernando, you were mentioning the year-over-year increase. I just want to understand a little bit more in terms of month-over-month performance of the agave, are you seeing more stable prices? Or are you continuing to see some marginal pressure on a sequential basis? And with regards also to agave, we have seen here, we were talking about in the past about the use of younger plants in order to offset prices and the lack of supply. Are you seeing the industry being more moderated on that one? That's the first question. I'll follow-up on the second one.

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [32]

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Luis, on agave, we have observed a substantial year-on-year increase in the price of agave as we've been mentioning it. We continue to see a challenge, overall, from the supply side as an industry. And as a result of that, we have seen the cost pressures corresponding to that. And we expect cost pressures to continue in the short term. That's the visibility that we have at this stage. We're not ready to make a forward-looking statement on the potential outlook of the agave market, we will need to wait and see how the market behaves.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [33]

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Fair enough. Fair enough, Fernando. Just in terms of your efforts, and I know it's a long-term process, but have you been successful in terms of increasing the contracts for long-term supply with third parties?

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [34]

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Well, we have been securing certain long-term contracts. They are not the majority of our third-party agave purchases. But they are material, and we continue to focus on making sure that we get the appropriate price. And more importantly, the corresponding shorter yield out of those contracts, but they're still not the majority of the third party contracts.

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Luis Miranda Valenzuela, Santander Investment Securities Inc., Research Division - Head of Food and Beverage [35]

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Perfect. And if I may follow, a last question to Michael. In terms of the U.S. operations, and we have seen in the past, a much higher growth in terms of consumption of premium and super-premium tequila versus mainstream. In terms of the recent numbers, if this trend is basically the same or it's accelerating?

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Michael J. Keyes, Proximo Spirits, Inc. - President & CEO [36]

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Yes. I think in general, tequila overall is -- we're blessed to be in categories, not just tequila but Irish whiskey, American whiskey that are in favor, and tequila has been in favor for a long time. We do see growth in all categories, but a lot of growth also coming from the super-premium tequilas. And yes, I foresee that continuing. I see no reason not to believe that that's going to continue.

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Fernando Suárez Gerard, Becle, S.A.B. de C.V. - CFO [37]

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Operator, thank you for the questions, and we're ready to wrap up. I'm delighted to follow up with the IR team for further questions from analysts and investors.

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Mariana Rojo Granados, Becle, S.A.B. de C.V. - Corporate Treasurer & IR Officer [38]

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Okay. 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. Thank you.

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Operator [39]

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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. Again, have a great day.