U.S. Markets close in 43 mins

Edited Transcript of UBL.NSE earnings conference call or presentation 8-Nov-19 10:30am GMT

Q2 2020 United Breweries Ltd Earnings Call

Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of United Breweries Ltd earnings conference call or presentation Friday, November 8, 2019 at 10:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Berend Odink

United Breweries Limited - CFO

* P. A. Poonacha

United Breweries Limited - Divisional VP of Finance

================================================================================

Conference Call Participants

================================================================================

* Aditya Soman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Amarjeet S. Maurya

Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps

* Ashit Desai

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Harit Kapoor

Investec Bank plc, Research Division - Analyst

* Himanshu Shah

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Jaykumar Doshi

Kotak Securities (Institutional Equities) - Equity Research Analyst

* Krishnan Sambamoorthy

Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG

* Manish Poddar

Reliance Nippon Life Asset Management Limited - Investment Analyst

* Mehul Desai

IDFC Securities Limited, Research Division - Research Analyst

* Prashant Kothari

Pictet - Indian Equities - Portfolio Manager

* Sunita Sachdev

UBS Investment Bank, Research Division - Executive Director and Equity Analyst

* Vishal Biraia

Aviva Life Insurance Company India Ltd. - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the United Breweries Q2 FY '20 Earnings Conference Call hosted by IDFC Securities. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Mehul Desai from IDFC Securities. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Mehul Desai, IDFC Securities Limited, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Thank you. Good evening, everyone. On behalf of IDFC Securities, I would like to welcome the management team as well as all the investor and analyst community for the Q2 FY '20 earnings call of United Breweries.

From the management side, we had Mr. Berend Odink, the CFO; and Mr. Poonacha from the Investor Relations. I'll hand over the call to the management for their initial opening remarks, and then we can open the call over to Q&A session. Over to you, sir.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [3]

--------------------------------------------------------------------------------

Thank you, Mehul. So good afternoon, good morning, everybody, on the call. Thank you for joining the call today.

Let me start with providing some context and commentary on our Q2 first half year results. And then after that, we'll, of course, open it up for questions. So first of all, the Q2 performance, the volume, UBL's performance was somewhat subdued with domestic volumes in the quarter registering 6.5% growth, and we saw mixed performance across the individual base. Our volume in West Bengal and Jharkhand levels, growth in West Bengal was triggered by reduced and consumer prices; and growth in Jharkhand was hurt by the change in the go to market from government retail to private retail. The markets, including Andhra Pradesh, Delhi, Orrisa, Tamil Nadu, Kerala, UBL grew double digits. Other markets like Karnataka, Goa and the markets for the West, excluding Maharashtra, saw a decline in the beer volumes; volumes in Maharashtra remained flat.

If we look at the main regions. In the North, UBL volumes were up low single digits, particularly Delhi was actually up strong double digits whereas Rajasthan, U.P. and Punjab were low mid-single digits up and Haryana volumes saw a strong decline.

In the South, UBL volumes were up 6%, and the growth in the region is attributed to the group growth in Andhra Pradesh, Kerala, Tamil Nadu and Telangana, with an exception of Karnataka which witnessed a decline in volume.

In the East, UBL volumes were up 40%, but volumes in West Bengal and Jharkhand, as I said, doubled; Orrisa reported double-digit volume growth.

In our region West, UBL volumes declined 8%, with the rest of Maharashtra growing around 6%, with meanwhile in the other markets in the West was the decline in volume.

If we look at our gross revenue in total, it was up 8% in the quarter, but gross margin declined by 365 basis points in the quarter. The fall in the margin was due to the high input prices on volume and glass in addition to the subdued revenue growth and unfavorable state mix as earlier referenced.

Shifting to the half year performance. Overall, domestic volumes grew year-over-year 6%. And going to the main regions in North, UBL volumes were up 2% with double-digit volume growth in Delhi, Punjab, Rajasthan and U.P.; and Haryana declining, again similar like [Q2 strong]. In South, UBL volumes were 7%. In Andhra Pradesh, Tamil Nadu and Kerala, up double-digit strong volume performance, but Karnataka and Telangana declined by mid-single digits. In East, UBL grew 28%. Again, volumes in West Bengal and Jharkhand growing nearly 100%, 80% strong volume; Orrisa volumes being flat. And in the West, kind of a similar trend, volumes declined 6%, [meanwhile] declined 8%, while the other markets in the West, with the exception west of Maharashtra, declined double digits.

Looking at the growth revenue line for the half year, this was up by 11%, and gross margin declined by 385 basis points compared to the prior year as again, input costs and volumes are up, remained high in the half year.

In conclusion, we saw a tough half year impacted by general elections, the severe weather in many parts of the country and cost pressures, coupled with lower economic growth. But despite the difficult operating environment perhaps there are certainly some positives in the first half year. UBL expanded market share based on our own estimates and available public information. Some of our innovations performing very well, and we've seen premium brands growing ahead of the total portfolio. And we had (inaudible) certainly comparing to particularly strong performance first half of the last year.

So at UBL, we remain convinced that the business fundamentals continue to be strong, with the mid and long-term (inaudible), the market growth drivers in place, and we expect the GDP growth, increasing urbanization and growth in population within new entrants into the legal drinking age.

So with that, I would like to conclude the opening comments, and welcome any questions you have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Krishnan Sambamoorthy from Motilal Oswal Securities.

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [2]

--------------------------------------------------------------------------------

Two questions for me. One, you highlighted an overall slowdown in demand during the quarter, and this was with us in Q1 as well. Does that mean that your CapEx plans for -- at least for FY '20 are lower than what they were originally in the past?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [3]

--------------------------------------------------------------------------------

Sorry, lower than? What was the last part of the question?

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [4]

--------------------------------------------------------------------------------

Yes, lower that what was initially planned?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [5]

--------------------------------------------------------------------------------

Yes. So we are just indeed our CapEx plan. So our outlook for full year will be in the area of INR 400 to INR 450 crores and that is really lower than we originally anticipated to be spent in the future.

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [6]

--------------------------------------------------------------------------------

And the second question is regarding working capital. In the press release, you have highlighted that there's been a delay in payments by state governments. Now is this, in your reckoning, something that's happening for the near term? Or is it something that you are worried about on a structural basis?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [7]

--------------------------------------------------------------------------------

So we see, I think, some year-over-year challenges in, let's say, payments being met on time, but particularly at the end of this quarter, we saw one of the states extending some credit to us. So that's why we called it out. And of course, we are, I would say, in a lot of control, many elements of our working capital. But when we're selling, of course to state corporations, this is somewhat out of our control in terms of payments in time, so this is a situation we faced at the end of Q2.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question is from the line of Amarjeet Maurya from Angel Broking.

--------------------------------------------------------------------------------

Amarjeet S. Maurya, Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps [9]

--------------------------------------------------------------------------------

Just wanted to understand like in a cost rising scenario, like on the raw material front, so what is the strategy to increase your operating margin? And from which state you're getting a, let's say, expected [value hike]?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [10]

--------------------------------------------------------------------------------

Okay. Thank you. On the first part of your question. So as you know, the bottles and the malt input costs are the key ones on the brewing side. Here, I think we see no further increases to the level that we are experiencing in Q1 and Q2. And we put in place additional measures to manage this cost in short and long term, I might say. So that's typically on the bottles and the malt.

The second part of your question was -- I'll let Poonacha pick that one up.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [11]

--------------------------------------------------------------------------------

Yes. I mean, with respect to increasing our margins, when that's -- always in the past, we're always looking at ways and means to increase our gross margin. But however, as you know that our business is situated in a manner wherein we have some cases are very profitable, some things are not. And then we have situations like states where they're highly profitable, then there's a decline in volumes. We have conquered this situation. We are working on ways to take price increases, but however, as you know, already, at the MRP level, beer is a highly priced alcoholic drink. So we have to be a little cautious that these price increases don't affect our volumes.

--------------------------------------------------------------------------------

Amarjeet S. Maurya, Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps [12]

--------------------------------------------------------------------------------

So sir, what is your current market share in the beer segment? And sir, what you are saying is like you're losing or you're stable or you're increasing market share? And I believe most of the market share is yours. So what is the strategies to increase in the future?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [13]

--------------------------------------------------------------------------------

So we believe we're above the 50% market share. And based on our estimates and publically available information, we believe we are growing around 1% to 2% market share points in the last 5 years. So that's definitely good news.

I'll answer the question of the outlook. I think we are confident that we have a good brand portfolio. We continue innovating. You've seen a couple of examples in the last 2 years. And we are encouraged that the [deal state] also the growth has been of the total portfolio, so we think the strategy is definitely paying off, and we have an ambition to continue to grow a bit ahead of the market, whether that every quarter will exactly turn out, that remains to be seen. But over time, we certainly set up a mission target.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question is from the line of Ashit Desai from Emkay Global.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Yes. So a couple of questions. One, if you could explain the very sharp increase in staff costs as well as other expenses when the growth has been low? And also, with regards to -- on your overall margin outlook, we did almost 18% last year. Is it possible to -- for you to go back to those kind of margin levels in the medium term? And yes, I'll state the second question later.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [16]

--------------------------------------------------------------------------------

So starting with your last question, yes, we don't put out guidance on the margin front as such, but we are confident on the input costs, I think, particularly malt and glass, we don't see further increases. So that's, I would say, an important element to your question.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [17]

--------------------------------------------------------------------------------

So on the margins, yes, let me take that. I think on the cost side, we've [certainly done] some of the fixed costs. So obviously, we have a very strong performance last year in the first 6 months. So this is something we have as comparable in the current 6 months. I think, by and large, we didn't see any one-offs positive or negative entering our results this 6 months. So normally, these are the normal salary increases, the normal vacancies, et cetera, being filled. So there are still, certain extent, some of those elements. But certainly, with the new economic reality that we see on the macro front in India, where looking critically over the cost lines in more detail, as you can imagine. So also on fixed costs, we continue to take appropriate measures for the lower growth patterns we have experienced the last 6 to 9 months.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Sorry, you're saying there are no one-offs in staff costs and other expenses? Because we haven't seen this kind of inflation with other companies?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [19]

--------------------------------------------------------------------------------

In staff costs, we have no one-offs. In the other costs, we have a couple of one-offs, which are basically under the rates and taxes. We have a one-off with respect to an entry tax wherein we took a INR 6 crores charge. The reason being the [latter dedicated], and since the government, after the implementation of GST, came up with the scheme wherein we could pay the principal amount and we get an exemption on interest and penalty; we accepted that offer.

And in addition to that, we had another INR 6 crores, which is on account of doing license fee name change, remember which we have been waiting for many years now. S

o barring that, the growth in other costs are up largely because of rates and taxes going up and Berend in his introductory had said that Haryana, the volumes are down. The volumes are down because the bottling fee or the fee, which is higher than the rates and taxes have gone up in Haryana drastically in addition to a something called [consent U.P.] So all this has increased the rates and taxes. So thereby, you see the growth in the other cost lines.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

Okay, okay. And for staff cost, 20% is the normalized run rate we should look at for second half also?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [21]

--------------------------------------------------------------------------------

This -- you're looking at growth from the first half or only the second quarter and second period quarter?

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

I didn't get you.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [23]

--------------------------------------------------------------------------------

You are looking at the growth of staff costs only in the second quarter or the first half growth in the period?

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Yes. Second quarter, it's like 20%; first half, it's somewhere between 16%, 17%, so.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [25]

--------------------------------------------------------------------------------

Yes, yes. So for the next half, you can take it at the half year rate and not at the quarter rate.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Okay. And this is driven by capacity increases or?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [27]

--------------------------------------------------------------------------------

Yes, we have added capacity in a lot of places, and we had a lot of structural obligation with respect to running the brewery, which needed additional manpower. So there has been some additional manpower which have been recruited. And so these are the reflections.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Okay. Just one last question, if I may, on CCI. Since the findings are out and not in public domain, if you can give us some idea as to if there's any material business impact from that? And what are the mitigating things that you have?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [29]

--------------------------------------------------------------------------------

Yes. I think there is, at this point in time, not too much more to comment besides what we have put in an [OTT] account. So I think the asset business is really operating with the ongoing investigation. The executives have appeared before the DG office, extensive efforts, complete disclosure to make (inaudible) to counter any presumptions or impact potentially made against the company.

Our understanding is that the DG has filed a report with the CCI. And yes, we will continue to present our case during any hearing by the CCI and submit all mitigating factors for their consideration. I think that's, yes, what we can comment on at this point in time in the CCI case.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

The next question is from the line of Harit Kapoor from Investec.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [31]

--------------------------------------------------------------------------------

Just had a few questions. Firstly, on the weakness in Karnataka as well as Maharashtra. The first half, you've seen a fairly weak performance from both the states. I just wanted to get your sense on why do you think performance has been so weak? And now that you're passed the elections and probably some shutdowns, et cetera, which were a challenge in Q1, and probably the monsoons also passed by in Q2, do you see a normalization of growth in these 2 states, which are very key to your contribution?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [32]

--------------------------------------------------------------------------------

I think if we look back first, for example, in Karnataka, we see Q1 impact from production constraints due to the general elections, for example, where the number of shifts you could operate was [procured] from what we usually operate. And in Q2, we've seen, particularly in North and also Karnataka, severe impacts of the monsoon which was, let's say, more intense and later in the year than previously.

And again, that all happened against the backdrop of lower GDP growth, which I think the company perhaps will continue to see for some time going forwards.

So it's partly, you could say, maybe there were a lot of incidental external impacts. But definitely, I think on the macroeconomic front, this is here for the coming months; that will not change all of a sudden I would say. But then it's a mixed bag of rate tax that we laid out in the press release.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [33]

--------------------------------------------------------------------------------

And for Maharashtra?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [34]

--------------------------------------------------------------------------------

In Maharashtra, as you know, rest of Maharashtra has grown. So that's the only (inaudible) in the West. Mumbai had declines, Goa had declines. And the monsoon has been the clear reason for decline in both Goa and in Mumbai. However, we don't expect great growth in Mumbai; it should remain flattish. However, our customers continue to grow.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [35]

--------------------------------------------------------------------------------

Understood. My second question was on the marketing spend side. So if you could just give us a sense how the advertising or marketing spends have kind of trended in the first half versus the first half last year, whether they have grown ahead of sales or you've invested more or how the competitive intensity is in the market? Is it higher than what it was 6 months back or lower? If you could just give some sense on that?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [36]

--------------------------------------------------------------------------------

Yes. Competitive intensity has been high and particularly high in profitable markets of Karnataka, but however our [ad spend] as a percentage of top line has remained the same, that we always maintain as a percentage of top line. But we reallocate the process where it is most required and as we have confirmed (inaudible) [local sales] that we have gained market share in the first half. And this comes with the investment, and we have been prudently investing in the marketing expense in the markets where they're most required.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [37]

--------------------------------------------------------------------------------

Okay, understood. Last thing was on any changes in -- because of certain go-to-market disruptions in AP and Telangana, you have seen quite significant growth there in those 2 states. But do you see that even the growth that you achieved in these 2 states it probably was hampered by the route to market, or there has been no effect for you? Because you seem to have grown double-digit in these 2 states, while probably some of the other players have got impacted here?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [38]

--------------------------------------------------------------------------------

Sorry, I didn't correct you about before, we didn't answer you. The route to market change has been only in Andhra Pradesh not in Telangana.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [39]

--------------------------------------------------------------------------------

No, I mean, there was an expectation that it might change in Telangana as well, which didn't….

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [40]

--------------------------------------------------------------------------------

It has changed in October, but that had only Andhra Pradesh has changed. So Berend will update you.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [41]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [42]

--------------------------------------------------------------------------------

So indeed, in Andhra Pradesh, forward, say, effectively, especially in retail, and that's reduced the outlets roughly by 20%. I think the impact in September was not that much significant. What we've seen in October, that is -- will certainly take some time to stabilize, and as such, we're closely monitoring the situation. This is definitely a key change in Andhra Pradesh taking place as we speak.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [43]

--------------------------------------------------------------------------------

Just to add one thing here. As a volume [variance], Andhra is not as big as Telangana, it is a near 6% of national volume figure.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Aditya Soman from Goldman Sachs.

--------------------------------------------------------------------------------

Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

--------------------------------------------------------------------------------

Two questions from my end. Firstly, you indicated that, I mean, growth in Mumbai is unlikely to sort of pick up meaningfully; and also in Karnataka, you are seeing sort of slowdown in growth with also, that you also mentioned earlier, that Haryana was affected. Is there something in these cities -- given there is large chunk of the volume share in Mumbai, Bangalore and Gurgaon account for lot of these, is there just increased competition from the rise of craft beers that are making you a little more -- little more pessimistic on growth? Or why have you been -- why is your guidance not more optimistic in these regions?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [46]

--------------------------------------------------------------------------------

No, I don't think the impact is mainly from craft. I think it will talk more about the economics in stock exchange plus the impact of particularly Mumbai severe weather, where I think you are seeing some of the new [boxes] that there was severe flooding a couple of times and in general, very tough weather conditions.

I think the craft as such, definitely, it's a popular in a number of areas you mentioned. Yes, in the total scheme of national markets, I would say it's relatively small, but yes, an important trend for terms of excitement about the beer category in the cost, I would say, that go through liquor.

--------------------------------------------------------------------------------

Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

--------------------------------------------------------------------------------

Got it. So you -- so you're attributing majority of the slowdown to -- that slowdown to the weather. But I was just curious why for Mumbai and you're also building in sort of flattish volumes even going forward, at least in the near term?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [48]

--------------------------------------------------------------------------------

Mumbai is one market, which has not been growing even when, what do you call, rest of Maharashtra (inaudible). When we say Mumbai, it is the upper limits of Mumbai. And there, if you see, really, consumption is not growing, because a lot of the people who even work in Mumbai probably stay and consume beer in Tana, which comes under rest of Maharashtra. So this is Mumbai, it is the upper limits of Mumbai, where really beer consumption has been flat for some time now.

--------------------------------------------------------------------------------

Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [49]

--------------------------------------------------------------------------------

All right. Understand. And the second question is on Kingfisher Radler. Any update on how that has been doing, given that we've seen a much wider distribution now?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [50]

--------------------------------------------------------------------------------

Yes, we think -- well, we're happy with the progress of partners, but at the same time, it's very early days to, I think, again, get to this conclusion. So we continue further distribution reach out also into the second half. So again, we're happy with the early progress, but I would say it's a bit too early to make any definite statements about success of the long-term prospects, but encouraging start for our products, yes.

--------------------------------------------------------------------------------

Aditya Soman, Goldman Sachs Group Inc., Research Division - Equity Analyst [51]

--------------------------------------------------------------------------------

All right. And any numbers you can share on how many distribution points or anything of that sort on Radler?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [52]

--------------------------------------------------------------------------------

I think we're about over 30,000 outlets at this point in time. I think more than 13 states and the second half, yes, we'll continue to expand on this. And as you know, it's a completely different route to market from beer, so we're using different distribution partners for that.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

The next question is from the line of Himanshu Shah from Dolat Capital Market.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [54]

--------------------------------------------------------------------------------

Sir, can you just give us some color on the raw material cost of what is giving us confidence that we may not see further price increases on the raw material part?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [55]

--------------------------------------------------------------------------------

Yes, we obviously are buying forward to some extent. So I think that is, for the next 1 to 2 quarters, we have a reasonable -- an outlook on what we can expect for longer term. Beyond that, we are also dependent on global commodity prices as such. So that becomes more difficult to make any definite statements. But I think on the short term, we are reasonably certain. And I think then beyond that, you're more looking at other impacts like legacy mix within the portfolio, managing statistics costs and the like, but purely both and the cost themselves. Yes, because I've commented earlier on the next 1 to 2 quarters, we will not see further increases.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [56]

--------------------------------------------------------------------------------

Thanks, that was helpful. So secondly, other than AP and Mumbai, can you help us how the consumer sentiment has been like maybe in the near-term compared to first half. You have already called out for AP and Mumbai. But for other states, the broader markets?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [57]

--------------------------------------------------------------------------------

Sorry, you were adding something to it?

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [58]

--------------------------------------------------------------------------------

Sir, you can carry on. And then I'll just ask the last piece.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [59]

--------------------------------------------------------------------------------

Okay. Yes, I think for the -- in terms of region -- moving comments, I think it's been a bit of a mixed bag. So we've seen some challenging markets like Western Karnataka, but also some healthy growing states, so partly the reason why economic factors and weather expenses. But also, it's difficult to take out any conclusion that things are particularly on one trend or the other. But I would say the overall economic impacts that the country, of course, is somewhat on a lower growth pattern. And I think, as any company in India, we will not be immune to that. So I think this has, to a certain extent, impacted the first half and most likely to continue for some months to come.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [60]

--------------------------------------------------------------------------------

So just the last question, what would be the contribution of West Bengal and Jharkhand on the overall volumes? And when were the price cutting behind West Bengal and the route-to-market changes took place in Jharkhand?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [61]

--------------------------------------------------------------------------------

The route-to-market changes in Jharkhand took place in this financial year. The change in route to market in West Bengal was over the last financial year, so we have moved our routemarket to a government corporation. And West Bengal and Jharkhand has volume sales for the country. West Bengal is around 5%, Jharkhand which is at 2%.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [62]

--------------------------------------------------------------------------------

And so West Bengal, when was the price correction that was taken place? And was it only in retrospect to reduction in excess too, or there was also a price cut that was taken by the company?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [63]

--------------------------------------------------------------------------------

See, the reduction in the prices in the MRP was the contribution of the company is being sacrificed. However, the volume has closed to double, and it has made up for the slack in price that we have taken.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [64]

--------------------------------------------------------------------------------

And when was this last taken, sir? In which quarter, if it could just help, that would be helpful. That's it from my side.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [65]

--------------------------------------------------------------------------------

I think in the last month of the first quarter, I think it was in June.

--------------------------------------------------------------------------------

Himanshu Shah, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [66]

--------------------------------------------------------------------------------

June '19, you are referring to?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [67]

--------------------------------------------------------------------------------

'19, yes. So the full effect of that is in the current quarter.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

The next question is from the line of Manish Poddar from Nippon India AIF.

--------------------------------------------------------------------------------

Manish Poddar, Reliance Nippon Life Asset Management Limited - Investment Analyst [69]

--------------------------------------------------------------------------------

Could you explain probably this gross margin deterioration, which you have at first. How much would be deferred further by state mix, and how much would be raw material in that?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [70]

--------------------------------------------------------------------------------

Sorry, sorry. Were you asking -- your question was actually not very clear?

--------------------------------------------------------------------------------

Manish Poddar, Reliance Nippon Life Asset Management Limited - Investment Analyst [71]

--------------------------------------------------------------------------------

So I'm trying to understand the raw material -- the gross margin deterioration, which is the test, how much would that be led by, at least, the state mix versus the raw material inflation?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [72]

--------------------------------------------------------------------------------

Yes. So we don't really split out, let's say, impacts of sales versus the coordinated prices. But I think year-over-year the input costs, of course, are an important element. And then state mix, let me say, is that for the first half it was negative. So the earlier comment was -- for example, Karnataka was at a lower volume than the prior year.

--------------------------------------------------------------------------------

Manish Poddar, Reliance Nippon Life Asset Management Limited - Investment Analyst [73]

--------------------------------------------------------------------------------

And would you be able to call up, let's say, what are the sort of inflation that you witnessed in glass versus barley?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [74]

--------------------------------------------------------------------------------

Well, glass prices have been up in the area of around 25%. And on top of that, as the glass industry in India is having some shortages, we also have a portion of our glass is imported from abroad, where prices are again 25%, 30% above the domestic prices. And I think in barley we are looking at around 16% to 20% higher prices versus this last year.

--------------------------------------------------------------------------------

Manish Poddar, Reliance Nippon Life Asset Management Limited - Investment Analyst [75]

--------------------------------------------------------------------------------

15%?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [76]

--------------------------------------------------------------------------------

15 points for barley.

--------------------------------------------------------------------------------

Manish Poddar, Reliance Nippon Life Asset Management Limited - Investment Analyst [77]

--------------------------------------------------------------------------------

Either barley is up about 10% odd. So is it primarily because of international or domestic mix or priced asset?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [78]

--------------------------------------------------------------------------------

Yes. This year, we have imported more barley than we did last year. But however, the price of imported barley is only marginally higher than the price of available local barley. But the advantage we have is imported barley can give you a better read of mark. So primarily the price increase of the commodity barley is affecting the cost.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

We move on to the next question that is from the line of Vishal Biraia from Aviva Life Insurance.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [80]

--------------------------------------------------------------------------------

Sir, in which one states are we expecting price hikes? Which are states, by effect, is taking guidance?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [81]

--------------------------------------------------------------------------------

Yes, we would not comment on the price changes or policies going forward. But in general, of course, we also usually strive for improvement in margin and therefore pursue some -- the moderate price increases at timely intervals, let me leave it at that.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [82]

--------------------------------------------------------------------------------

The reason being, in most cases, price increases are a result of discussions with the state governments and state-owned corporations. So to tell you that we are, on a regular basis, in touch with various state government corporations. But where we are moving for a price increase we would not be able to share, because only after it comes through we can share.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [83]

--------------------------------------------------------------------------------

Fair enough, sir. Sir, Heineken as a brand, what would be the contribution to our revenue?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [84]

--------------------------------------------------------------------------------

We would not split out, let's say, specific for brands. But as you know, Heineken is an important brand, let's say, in the totem of the portfolio. So there, we continue to leave the best behind, let's say even to a higher extent. And this is a long-term good prospects for the market and the brand with the premium. So there the Heineken brand is an important brand for us to date. We don't provide specific guidance on an individual brand.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [85]

--------------------------------------------------------------------------------

Okay. Would you be able to tell me if Heineken has grown higher than the 6% growth that we achieved for the whole portfolio?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [86]

--------------------------------------------------------------------------------

No, we don't split out the brand names or individual brands. But we commented that in general, the premium part of the portfolio has been growing higher than the total, and of course is very encouraging.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [87]

--------------------------------------------------------------------------------

Okay. So the premium part is growing faster than the company average, that's right?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [88]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

The next question is from the line of Sunita Sachdev from UBS Securities.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [90]

--------------------------------------------------------------------------------

I just have 2 very small questions. One, I think given the route to change -- these 2 market changes, et cetera, notwithstanding any of the constant push that you guys have with various state governments. Just wanted to understand how is the number of outlets where beer is available changed over the last 1 to 2 years? How many outlets do we now have across the country?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [91]

--------------------------------------------------------------------------------

Approximately 83,000 outlets.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [92]

--------------------------------------------------------------------------------

And this is -- how does this compare with [6 months] ago?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [93]

--------------------------------------------------------------------------------

It could be almost flat, because I mean when the Heineken brand came, it skid down, and then it was double so it has gone up. But only after the CCI, we have stopped packing.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [94]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [95]

--------------------------------------------------------------------------------

So in that region, plus or minus 5%. Now the retail outlets in Andhra has come down 20%.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [96]

--------------------------------------------------------------------------------

Right.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [97]

--------------------------------------------------------------------------------

So there's a lot of things. But by and large, as a country as a whole, should be in that 80,000 what we call region, because it was max 83,000 before the Heineken brand.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [98]

--------------------------------------------------------------------------------

And what is the push across various state governments and availability at maybe malls, supermarkets, et cetera? How -- what is the visibility for these 80,000 units 2 to 3 years?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [99]

--------------------------------------------------------------------------------

Yes. I mean, you have -- it is 80,000 loads. We have some premium outlets. And usually, a very small percentage, only less than 10% of the overall places where beer is available at premium outlets.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [100]

--------------------------------------------------------------------------------

And that premium outlet growth will be quite robust, my assumption would be right?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [101]

--------------------------------------------------------------------------------

We are talking about growth of volumes in same outlets or are we talking about premium brands?

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [102]

--------------------------------------------------------------------------------

Premium outlets itself.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [103]

--------------------------------------------------------------------------------

We can't see it. It's kind of very different. But I think that a lot of these premium outlets sell premium brands, by and large, you're right.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [104]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [105]

--------------------------------------------------------------------------------

But if it is -- if you look at overall volumes, then it may not be, reason being the premium segment is small when compared to overall volumes.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [106]

--------------------------------------------------------------------------------

Okay. Good to know. Second question, now that more and more states seem to be moving towards the corporation model, are there any financial instruments renewal which you can potentially use to pass on the repayment risk to maybe the intermediaries?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [107]

--------------------------------------------------------------------------------

Yes and no. Yes, I mean in one way, it is a happy situation if we have a corporation business being the -- it is a state-backed method to assure of your own connection. But here -- it's government sold. The other downside is in the event if the state government is facing financial, what we call, crisis or a shortage of cash flow, there is tendencies of the government dipping into the corporation funds, wherein there have been situations where there being unusual delay in payments. So it was against us in some places.

--------------------------------------------------------------------------------

Sunita Sachdev, UBS Investment Bank, Research Division - Executive Director and Equity Analyst [108]

--------------------------------------------------------------------------------

So passing on repayment risk is not an option?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [109]

--------------------------------------------------------------------------------

It cost a lot of money. Because I mean today, if you have to go to the factories, you would see there the cost of factories would be close to twice the customer borrowings. So being financially, I mean, what's coined -- what you call highly rated companies. I mean our short-term rating is definitely a plus. I mean we can borrow money at timed rates. So it makes sense for us to fund our return and then factor return, then incur costs and further reduce our bottom line.

--------------------------------------------------------------------------------

Operator [110]

--------------------------------------------------------------------------------

The next question is from the line of Krishnan Sambamoorthy from Motilal Oswal Securities.

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [111]

--------------------------------------------------------------------------------

How large is the super premium segment of the market, premium also to the segment market in terms of number of cases now on an annualized basis?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [112]

--------------------------------------------------------------------------------

Sorry, I couldn't hear your question?

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [113]

--------------------------------------------------------------------------------

How large is the premium segment of the market in terms of number of cases annualized?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [114]

--------------------------------------------------------------------------------

If you take the entire industry, I'm not talking about UB alone, the super premium segment is less than 5%.

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [115]

--------------------------------------------------------------------------------

Okay. And what's the pace of growth has that -- it was growing at 20%, 25%, 30% sales side, has that been maintained?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [116]

--------------------------------------------------------------------------------

'

Yes.

--------------------------------------------------------------------------------

Krishnan Sambamoorthy, Motilal Oswal Securities Limited, Research Division - VP of Research of FMCG [117]

--------------------------------------------------------------------------------

Okay. And lastly, you had a lower market share in this particular segment compared to your overall market share? Has that -- has your market share also increased in that segment?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [118]

--------------------------------------------------------------------------------

Yes, we have.

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

The next question is from the line of Ankur Shah from (inaudible) Capital.

--------------------------------------------------------------------------------

Unidentified Analyst, [120]

--------------------------------------------------------------------------------

Sir, can you let us know the premium portfolio mix?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [121]

--------------------------------------------------------------------------------

I think...

--------------------------------------------------------------------------------

Unidentified Analyst, [122]

--------------------------------------------------------------------------------

The exact premium portfolio.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [123]

--------------------------------------------------------------------------------

We just answered the question, wherein we said that we take the industry as a whole. The super premium segment is less than 5% of the total industry.

--------------------------------------------------------------------------------

Unidentified Analyst, [124]

--------------------------------------------------------------------------------

It wasn't expected. And for the year?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [125]

--------------------------------------------------------------------------------

We won't share that.

--------------------------------------------------------------------------------

Unidentified Analyst, [126]

--------------------------------------------------------------------------------

Okay. So then the second question, on the capital allocation of Radler. Sir like Bihar is quite a nascent market in India. And considering the opportunities that we have overall in the segment, considering all the factors which are just there for the time of the deal. So why hasn't United Breweries taken a decision to invest in non-alcoholic beverage?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [127]

--------------------------------------------------------------------------------

I think twofold. One, I think we see an opportunity beyond lager beer. So if you look internationally, Radler has been a segment quite successfully in many, many countries. So definitely for India, we think there's a long-term potential in this category. Again, as I said earlier, this is not a slow lieu of investments for 6 months or 1 or 2 quarters. It's a long-term approach. So hence, we decided to step into that opportunity by launching Radler.

And the second part is also, let's say, an opportunity-driven approach that we produced in Bihar, which as a state, as you know, has existing prohibition. So our production facility over there continues to be used. And in that sense, we allocated it completely to Radler, which is then exported across India from Bihar.

--------------------------------------------------------------------------------

Unidentified Analyst, [128]

--------------------------------------------------------------------------------

I got just one last question, which is do we see any portfolio gaps in the premium or semipremium segment like, I think we were planning to launch a craft beer to compete with Bira. So are there any thought process on that? Because in Mumbai markets, though we haven't seen growth, but just like a casual optimism whenever I'm visiting a bar or wherever I'm going, there's a lot of push on the Bira brand. So how are we planning to compete with that?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [129]

--------------------------------------------------------------------------------

Yes. Well, we'll not comment directly on competitors. But let's say, if we look at -- as you're aware, we have earlier propitiated that we have plans to launch our own craft beer. So in the coming months, we're quite excited to have been launching that in many states. And I should say, the weak beer segment continues to go healthy. So this is something we'll definitely start thinking to come with our own compositions. In fact, some of the import brands that we already have available, which also are, I mean, in this category.

--------------------------------------------------------------------------------

Operator [130]

--------------------------------------------------------------------------------

The next question is from the line of Harit Kapoor from Investec.

--------------------------------------------------------------------------------

Harit Kapoor, Investec Bank plc, Research Division - Analyst [131]

--------------------------------------------------------------------------------

Just one more question. You've mentioned in your press release, regarding the high input cost pressures and overall cost pressure. You said that the company has already initiated measures to mitigate this cost push. So in the context of, let's say, if you were about the forward covers, which you've taken on the input costs? Or is it about relooking at overhead, et cetera. Just wanted to understand what are those measures that you're talking about?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [132]

--------------------------------------------------------------------------------

Yes, thank you for your question. It's both, actually. So it's long term. So I think, for example, at glass, we're working with suppliers to expand the capacity in India. So in that area, there are a couple of those measures where we strategically look at the supply footprint and the strategy around that, longer term. But of course, also short term where, as I stated earlier, the -- we look if the level of the cost lines has taken place. And just given the new GDP outlook occurring today, we're looking with that in mind, again, at our cost structure. And this is a bit more, let's say, short term driven as well.

--------------------------------------------------------------------------------

Operator [133]

--------------------------------------------------------------------------------

The next question is from the line is from [Sandya Satpati] from [Amristar Capital Partners].

--------------------------------------------------------------------------------

Unidentified Analyst, [134]

--------------------------------------------------------------------------------

Just my first question is that your company's EBITDA margin is quite volatile in recent past. Is there some kind of a sustainable margin that the company can deliver in cost?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [135]

--------------------------------------------------------------------------------

Well, we don't give out margin guidance, but let me comment that some at our top line in terms of pricing, in many states, set by corporations and state government. So we are not at, let's say, our own liberty to move prices up and down as such. So we have, let's say, less flexibility as you might have seen in other industries. And hence with the cost moving as we are, which we explained earlier, the margin in our business, yes, might move up quite commonplace as you pointed out. So that's, I would say, a direct impact on top line and cost advantage.

--------------------------------------------------------------------------------

Unidentified Analyst, [136]

--------------------------------------------------------------------------------

And then can you give us a sense of what really is the barley price, let's say now in the international market versus what you have been using in the last 6 months? And the other thing that I just want to check with you, that you have made some comment that you had hired some extra people, a certain brewery. I couldn't really get what really you were talking about in that.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [137]

--------------------------------------------------------------------------------

Regarding the extra people that we have hired, most of them have been on account of compliance and actually needs. I mean, there are certain compliance that are too easy to meet. So most of these have been to meet the new adjusted higher level of compliance needed at our factory units.

--------------------------------------------------------------------------------

Unidentified Analyst, [138]

--------------------------------------------------------------------------------

Okay. So this is going to be recurring expense, going forward?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [139]

--------------------------------------------------------------------------------

Recurring, I mean, yes. They are permanent employees. They've been already on board.

--------------------------------------------------------------------------------

Unidentified Analyst, [140]

--------------------------------------------------------------------------------

Okay, okay. And then can I just get a sense of the index of barley prices or glass prices is at now versus in the past and further the outlook there?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [141]

--------------------------------------------------------------------------------

As Berend commented, outlook going forward for the next half of the financials is flat from today. But vis-à-vis last year, both glass and barley prices have been up in the region of 10%, 11%.

--------------------------------------------------------------------------------

Unidentified Analyst, [142]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [143]

--------------------------------------------------------------------------------

As a weighted average.

--------------------------------------------------------------------------------

Unidentified Analyst, [144]

--------------------------------------------------------------------------------

Okay. So they're going to stay flat, they're not going to decline?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [145]

--------------------------------------------------------------------------------

No, no, no. We don't expect it to decline.

--------------------------------------------------------------------------------

Operator [146]

--------------------------------------------------------------------------------

The next question is from the line of Ashit Desai from Emkay Global.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [147]

--------------------------------------------------------------------------------

On working capital, this increase across some states, is it a temporary thing or it's a permanent change in the payment methodology?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [148]

--------------------------------------------------------------------------------

It depends on how well the state government financial do. So we really can't comment on the temporary appointment.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [149]

--------------------------------------------------------------------------------

But have they changed the payment terms as such?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [150]

--------------------------------------------------------------------------------

No, it has not changed. But the payments have been delayed.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [151]

--------------------------------------------------------------------------------

Okay, okay. And you put a note on discontinuation of an export vendor. Can you give some more color on this as to what it is and what the impact is?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [152]

--------------------------------------------------------------------------------

Yes. I mean, well, the impact has pointed out that export volume has been below last year and below what we've seen in the domestic market. So such was an impact.

I would say the good news is there's no impact as such from the consumer end. So that would help UBL there, but it's more due to a change in agent that we're undergoing right now. So longer term, this should not be -- that being an impact that is recurring.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [153]

--------------------------------------------------------------------------------

Okay. And for this quarter, what was the impact on top line and EBITDA due to this?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [154]

--------------------------------------------------------------------------------

Well, we don't call out separately the financial impacts of this. But you would see from the volume figures that exports were down, I would say, roughly by about 15%. But we're hopeful that once we have a new agreement in place, that this will reestablish itself for 2020.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [155]

--------------------------------------------------------------------------------

Okay. And when do you expect this new agreement to be in place?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [156]

--------------------------------------------------------------------------------

As we stated in the notes, this is currently what we're undergoing. So this might take a quarter or something to be up and running.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [157]

--------------------------------------------------------------------------------

Okay, got it. And lastly, from an overall industry perspective, healthy competitive activity, very high, or you see your competitors reducing discounts? And is most of that over or it's still continuing?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [158]

--------------------------------------------------------------------------------

No. I would say, in general, there's healthy competitive pressure in the pending new markets. The major rules are present here with all their main brands. So yes, it's been quite a competitive situation. But we're happy that we have seen our market share increase in the first half. And it gives us confidence in the strategy that we're executing for our portfolio, and that's what we will continue to do going forward.

--------------------------------------------------------------------------------

Ashit Desai, Emkay Global Financial Services Ltd., Research Division - Research Analyst [159]

--------------------------------------------------------------------------------

But has that increased in the recent ones or it's stabled?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [160]

--------------------------------------------------------------------------------

Well, I don't know how we could kind of compare the level of competitiveness. I think in general, I don't think it has declined, given the -- that's because the industry declined somewhat, then you could say that the competitiveness as such is -- continues to be strong. And of course, there are some differences state by state and relative position. But I would say overall it's simply not declined.

--------------------------------------------------------------------------------

Operator [161]

--------------------------------------------------------------------------------

The next question is from the line of Jay Doshi from Kotak Securities.

--------------------------------------------------------------------------------

Jaykumar Doshi, Kotak Securities (Institutional Equities) - Equity Research Analyst [162]

--------------------------------------------------------------------------------

So employee cost increase in the first half is about 18%. And on a sequential basis, 1Q and 2Q similar. You indicated some increase in headcount, did you -- still the requirement. So is it -- all current quarter number is a normalized number, or should we expect further increase or in terms of...

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [163]

--------------------------------------------------------------------------------

You can take this as a base.

--------------------------------------------------------------------------------

Jaykumar Doshi, Kotak Securities (Institutional Equities) - Equity Research Analyst [164]

--------------------------------------------------------------------------------

Second is on other expenses. You indicated rates and taxes have gone up. Is it possible to give us an indication of what rate and taxes as a percentage of revenue was in the first half of current fiscal versus last year? And similarly, any indication you can give on E&P spend as a percentage of revenue in the first half of last year's Q2.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [165]

--------------------------------------------------------------------------------

Rates and taxes, I mean it again depends on mix. Like I said, rates and taxes are not even -- and it's not across devolving in all states. Haryana rates and taxes have gone up, which has essentially the volumes and the volumes were declined. You have new rates and taxes. It is in the (inaudible) something called (inaudible). And you have some of your rates and taxes in Rajasthan. So it depends on how the volumes in these states do. You can't take it as a percentage of overall volumes. So the state mix plays a big role on the rate and taxes.

--------------------------------------------------------------------------------

Jaykumar Doshi, Kotak Securities (Institutional Equities) - Equity Research Analyst [166]

--------------------------------------------------------------------------------

I understand. Okay. Any claim on advertising and A&P spend? As you indicated flat, as a percentage of revenue it's flat?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [167]

--------------------------------------------------------------------------------

Yes. I mean, we do mention that.

--------------------------------------------------------------------------------

Operator [168]

--------------------------------------------------------------------------------

The next question is from the line of Vishal Biraia from Aviva Life Insurance.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [169]

--------------------------------------------------------------------------------

So these rates and taxes are applicable only for beer or spirits as well?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [170]

--------------------------------------------------------------------------------

Sorry. The line was -- could you repeat the question?

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [171]

--------------------------------------------------------------------------------

Sure. The rates and taxes are not in other states. So was it applicable to only beer or also spirits as well?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [172]

--------------------------------------------------------------------------------

Rates and taxes are for both spirits and for beers.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [173]

--------------------------------------------------------------------------------

Okay. And also, I mean, if we see the increase in overhead from about INR 4.07 billion to this -- in 2Q of last year to INR 5.07 billion at least this year. The increase has been substantial and would you say that bulk of the increase would have been contributed by rates and taxes? Because the one-off kind of...

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [174]

--------------------------------------------------------------------------------

Of the INR 80 crore -- I'll give you the number -- as you're interested on that, I'll give you the number. Of the INR 80 crore, INR 30 crore is rates and taxes. There are 2 one-offs of INR 12 crore each, so INR 54 crore is actually there itself.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [175]

--------------------------------------------------------------------------------

Okay, okay. All right. And the balance increase would be because of a northern admin expenses and [83] (inaudible) is the increase, would that be fair?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [176]

--------------------------------------------------------------------------------

Yes, yes, yes.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [177]

--------------------------------------------------------------------------------

okay. And just one last question. You have grown by 6% of volumes. Of what would have been the industry growth? Any numbers on that?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [178]

--------------------------------------------------------------------------------

So we think our portfolio grew domestically around 6%, 6.5%. And we think the total industry was around half that, that nature.

--------------------------------------------------------------------------------

Vishal Biraia, Aviva Life Insurance Company India Ltd. - Analyst [179]

--------------------------------------------------------------------------------

Count that would. So this would imply that most of the operators would have been -- is that flat or marginally negative. Is that your fair assessment, just mathematically?

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [180]

--------------------------------------------------------------------------------

The mathematics will certainly tell you that fix.

--------------------------------------------------------------------------------

Operator [181]

--------------------------------------------------------------------------------

The next question is from the line of Prashant Kothari from Pictet.

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [182]

--------------------------------------------------------------------------------

Yes. A fixed cost question on the A&P again. The A&P expenses have come down a lot over the years, in terms of percentage revenues. Do you think they have potential to kind of grow a lot more in the future years?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [183]

--------------------------------------------------------------------------------

You're too soft. I can't hear your question.

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [184]

--------------------------------------------------------------------------------

Sorry, I'll just pick up the handset. The question is on the A&P expenses. The expenses have come down a lot over the years in terms of percentage to revenues. Do you think this can -- could climb up again, or this is the more normalized view?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [185]

--------------------------------------------------------------------------------

I will address this. If you look at A&P expense over the last 5 years, it would have come down. This would be in the last few years that the discounts that we give or the trade push that we do, in the past it came as part of the A&P expenses due to the change in the accounting standards with respect to those trends on brands and volumes dispatched from our own units, it is located on the top line. What you see now is only a small percentage, which is we spend them on behalf of those brands which are bottled by our contract brewery operations. But the brand building spends, which we don't show separately, has maintained as a percentage of their top line.

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [186]

--------------------------------------------------------------------------------

Okay, got it. Okay. And the second question is on this CCI investigation. Have you made any provisions for any contingent liability there?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [187]

--------------------------------------------------------------------------------

No, we have not made any provisions.

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [188]

--------------------------------------------------------------------------------

I mean, because you already admitted that there is some rounding there. So is it not be prudent to make a provision?

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [189]

--------------------------------------------------------------------------------

As an accountant, I would answer it very differently. When you have to make a provision, you need to have a way to estimate it.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [190]

--------------------------------------------------------------------------------

I mean, we have not received any demand order or anything as such. So there's also more particular basics to say in financial particularly if it's forthcoming, so as such in the northern region's stake.

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [191]

--------------------------------------------------------------------------------

Okay, okay.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [192]

--------------------------------------------------------------------------------

How you estimated? They're yet estimating it, no?

--------------------------------------------------------------------------------

Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [193]

--------------------------------------------------------------------------------

Yes. But we know that there will be some amount to be paid. I don't know how it estimated, but there's obviously some impact that you need to take.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [194]

--------------------------------------------------------------------------------

No. So as I said earlier, we have not received any such information and no provisions at this point in time are made.

--------------------------------------------------------------------------------

Operator [195]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions. I now hand the conference over to the management for the closing comments.

--------------------------------------------------------------------------------

Berend Odink, United Breweries Limited - CFO [196]

--------------------------------------------------------------------------------

Okay. Thanks, everyone, for your attention and interest in the company. Thank you for the questions. We look forward to the next call and wish you a good day. Thank you.

--------------------------------------------------------------------------------

P. A. Poonacha, United Breweries Limited - Divisional VP of Finance [197]

--------------------------------------------------------------------------------

Thank you (inaudible).

--------------------------------------------------------------------------------

Operator [198]

--------------------------------------------------------------------------------

Ladies and gentlemen, on behalf of IDFC Securities, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.