Becle SAB de CV

BMV:CUERVO

Earnings Call Transcript

[Operator]

Good morning, and thank you for joining Becle's First Quarter Unaudited Financial Results Call.

During this call, you may hear certain forward-looking statements. These statements may relate to our future prospects, developments, and business strategies and may be identified by our use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, and similar terms and phrases, and may include references to assumptions. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions.

Because forward-looking statements relate to the future by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements. Before we begin, we would like to remind you that the figures discussed on this call were prepared in accordance with International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the first quarter of 2025 is preliminary and is provided with the understanding that once financial statements are available, updated information will be shared in the appropriate electronic formats. [Operator Instructions]

Now I will pass the call on to Becle's CEO, Mr. Juan Domingo Beckmann.

[Juan Legorreta, executive]

Good morning, everyone, and thank you for joining us today as we discuss Becle's first quarter 2025 results. Before our regional directors and CFO discuss our results in detail, I'd like to share some perspective regarding the start of the year and our overall position as a company. As we enter 2025, we acknowledge a complex and challenging industry environment, driven by uncertainty and cautious consumer behavior. Despite challenging dynamics, the resilience of our core categories, particularly Tequila, gives us greater confidence in the stability and long-term attractiveness of our business.

Our premiumization strategy remains central to our growth ambitions. We remain encouraged by consumer preferences that continue to lean towards high-quality authentic brands and sustained momentum in key growth areas like premium Tequila. These trends align well with our portfolio strengths and position us to capitalize as markets gradually recover. Across regions, we continue to take disciplined approach, protecting brand equity, optimizing execution, and prioritizing investments that will drive long-term value. From innovation and digital transformation to multicultural engagement and portfolio expansion, we are building the foundation for sustained, profitable growth. We're also pleased to report strong financial performance and a healthy cash flow generation, which will continue to support our strategic investments with a clear strategy, a strong brand portfolio, and an experienced leadership team. We remain confident in our ability to navigate near-term challenges while advancing our long-term goals and creating lasting value for our stakeholders. Thank you.

And with that, I'll turn it over to Luis Felix to discuss our U.S. and Canada results.

[Luis Felix, executive]

Thank you, Juan, and good morning, everyone. Before diving into our results, as previously announced, I will be retiring as Managing Director of Proximo U.S. and Canada in July. It's been an incredible 25-year journey, and I want to sincerely thank Juan Domingo and the entire Becle team for the partnership and the support. I'm also pleased to welcome Mauricio Vergara as my successor. Mauricio brings extensive global leadership experience from Brown-Forman, FEMSA Beer, and most recently, as President and COO of Patron and other brands at Bacardi. I'm confident that he will lead Proximo into the next chapter of growth.

Now turning to our first quarter results. Please note that the figures shared in today's remarks are expressing on a dollar basis. Net sales value was flat year-over-year, primarily due to favorable product mix as growth in premium Tequila helped offset continued softness in the RTD business. In the face of the high net promotional activity, we maintained a disciplined pricing strategy, balancing near-term competitiveness with long-term brand equity. Shipments declined 3.6%, while depletions fell 5.7%. The decline in shipments was largely due to a tough comparison against the prior year, which saw a growth of 4.8%. However, excluding RTDs and nonalcoholic products, shipments increased by 2.7%, highlighting the drag these categories had on our consolidated performance.

Currently, our core Tequila business delivered solid growth in both shipments and depletions. Consumer takeaway trends remain generally positive according to the latest 13-week Nielsen data. When excluding RTDs and nonalcoholic segments, our spirits portfolio grew 1.2%, outperforming the total industry, which declined 1.8%. Overall, our total spirits business was flat, slightly ahead of the broader spirits market, which declined by 0.1%. Looking ahead, we expect to face continued challenges, including competitive pricing and potential U.S. inflation pressures from tariff increases of many imported goods. That said, we are pleased that tariffs uncertainty of Mexico appears to be easing, with the U.S. government confirming that USMCA-compliant goods, including our Tequila export from Mexico, are for now exempt for these tariffs. We recognize this is an evolving situation, and we'll continue to monitor it closely.

At the same time, we remain confident in the long-term fundamentals of the U.S. spirits business, supported by several positive trends, including continued growth in the Tequila category. Premiumization and consumer trade-up behavior continues to shape the category growth, particularly in Tequila and American whiskey, where demand for high-quality authentic brands remains strong.

RTDs also remain as a resilient growth engine, especially among younger convenience-driven consumers. In response, we're investing in innovation and enhancing our digital and e-commerce capabilities to meet consumers where they are. Additionally, we are placing strong focus on engaging multicultural audiences whose growing entrance is redefining the future of the industry. These trends, combined with our clear strategy and disciplined execution, position us well to capture future opportunities and deliver sustainable long-term growth.

I will now turn the call over to Olga Limon to discuss the Mexico and Latin America results.

[Olga Montano, executive]

Thank you, Luis, and good morning, everyone. In the first quarter of 2025, Mexico spirits industry contracted amid ongoing economic uncertainty and restrained consumer demand. There was evidence of slower retail activity with ANTAD showing flat year-on-year growth for the January-March period, alongside visible signs of pressure in the on-premise channel. Net sales value declined 13.8% due to lower volumes and a slight decrease in the average price per case. This resulted from sustained discounting activity that started in the latter part of 2024. However, a more favorable mix supported by stronger Tequila performance partially offset the impact.

Depetitions fell 6.1% and continued to outpace shipments in the first quarter, reflecting renewed destocking. While past destocking was primarily retail driven, wholesalers are now holding leaner inventories. Additionally, last year's strong promotional activity by retailers led to a challenging comparison base. This was further impacted by the timing shift of Easter from Q1 last year to Q2 this year, likely driving some volume recovery in next quarters. According to Nisan data through February, we gained volume share in both total spirits and Tequila. Tequila remained the most resilient category, and we continue to outperform the industry in that segment.

In terms of value, our spirits performance is aligned with the broader industry, maintaining our market position. Looking at consumer trends, we're still operating in a tough environment marked by cautious spending, inflation, economic uncertainty, and insecurity impacting on-premise consumption continue to weigh on purchasing behavior. That said, the pace of contraction eased versus previous year pointing to potential stabilization.

As mentioned on the last call, the first half of the year typically contributes less to overall volume sales than the second half. In the first quarter of 2025, seasonal trends continued to normalize alongside consumer demand, and we anticipate stronger performance later in the year. In Latin America, the operating environment remains challenging with ongoing inflation and political uncertainty. Even so, we are seeing encouraging signs of stabilization. Shipments slightly declined, and net sales value increased, supported by favorable FX. Additionally, depletions were closely aligned with shipments, indicating healthier inventory levels.

Overall, in the context of a volatile external environment, we remain focused on disciplined execution, protecting market share, and driving long-term value through our diversified portfolio.

I will now turn the call over to Shane Hoyne, Managing Director of EMEA and APAC. Thank you.

[Shane Hoyne, executive]

Thank you, Olga, and good morning, everyone. In the first quarter of 2025, shipments in the EMEA and APAC regions declined 14.9% compared to the same period last year, while depletions were down 5%. This outcome matched our expectations, driven by anticipated changes in shipment timing across key EMEA markets and Easter-related volumes rolling into the second quarter. Additionally, lower shipments into Asia during Q1 last year are being smoothed out more evenly across 2025.

The difference between shipments and depletions mainly reflected challenging trends in developed EMEA markets. While certain markets require close monitoring, we remain confident in the region's long-term growth potential and continue seeing promising opportunities ahead.

Net sales value declined 22.4% year-on-year on a local currency basis, primarily due to mix of products and markets. The 5% decrease in depletions resulted mostly from continued destocking efforts by wholesalers as they work to manage elevated inventory levels across developed EMEA markets. Consistent with trends we saw through 2024, consumer confidence remained fragile in quarter 1. Caution persisted, particularly in Asian markets where the threat of escalating tariffs has further impacted sentiment.

Across the region, third-party distributors remain highly focused on reducing working capital and stock holdings, a trend we expect to continue through the rest of the year. Meanwhile, ongoing geopolitical conflicts in Eastern Europe and the Middle East continued to disrupt business during the quarter.

Despite these headwinds, we remain optimistic about the year ahead. Tequila shows -- continues to show strong long-term potential as an early-stage growth category with both volume and value opportunities.

Our portfolio strength and established route-to-market strategy position us well to capitalize on this growth. We continue actively reviewing and optimizing our local partnerships to support this momentum. Looking ahead, we anticipate sustained growth in Asia, gradual stabilization in Europe, and emerging opportunities through Africa and the Middle East.

I will now pass you over to Rodrigo, who will take you through the financial results.

[Rodrigo de la Maza Serrato, executive]

Thank you, Shane, and good morning, everyone.

I will now walk you through the financial results for the first quarter of 2025. The company reported a 7.5% increase in consolidated net sales, reaching MXN 9.6 billion, driven by favorable ForEx exchange effects and a positive price gearing driven by both geographic mix and progress on our premiumization strategy. The focus on higher-value brands and product mix optimization helped offset the impact of lower volumes. While regional challenges persisted, our strong brand portfolio and effective execution of strategic initiatives helped deliver a strong financial performance.

Q1 EBITDA increased 22% year-over-year to MXN 2.2 billion, with the EBITDA margin expanding by 270 basis points to 22.5%. This result was mainly driven by a strong 570 basis point expansion in gross margin, reaching 57.8%, the highest reported since the second quarter of 2018. Key contributors included lower agave-related input costs, the gradual transition through older, higher-cost inventory, plus the benefits from our operations productivity agenda in strategic sourcing and operating efficiencies.

Additionally, favorable foreign exchange and a more profitable geographic mix, led by a larger contribution from the U.S. and Canada region, further supported the gross margin uplift. Below the gross profit line, the flow-through to EBITDA remained solid through slightly -- though slightly diluted due to A&P, distribution, and SG&A expenses, which were mainly U.S. dollar-denominated and pressured by the depreciation of the Mexican peso. A&P as a percentage of net sales held steady year-over-year, reflecting disciplined marketing prioritization amid softer demand in certain markets.

Distribution expenses also remained relatively stable. The main offset came from higher SG&A expenses driven not only by FX impacts, but also by ongoing strategic investments in system infrastructure and organizational capabilities to improve long-term growth, margin expansion, and cash flow conversion. Financing results recorded an expense of MXN 262 million in the first quarter of 2025 compared to MXN 103 million in the same period of 2024. This increase was primarily driven by MXN 179 million year-over-year foreign exchange swing, driven by the depreciation of the Mexican peso.

Despite this impact, net income grew 15.5% in the quarter versus the previous year, reaching MXN 1.2 billion. As of March 2025, cash and cash equivalents stood at MXN 11 billion, marking an increase of MXN 3.4 billion versus the same period of the previous year. Total debt amounted to MXN 26.7 billion. Importantly, during the first quarter of 2025, the company generated MXN 1.5 billion in net cash from operating activities and deployed MXN 712 million in net investing activities. Over the past year, we reduced our lease-adjusted net debt ratio from 2.6x to 1.9x, slightly below industry standards.

This improvement enhances our financial flexibility, allowing us to sustain strategic investments, pursue high-return investment opportunities, and continue to pay dividends. Overall, despite ongoing industry challenges, our first-quarter financial results were top tier within the industry. Net sales value increased 7.5%, gross margin expanded by 570 basis points to 57.8%, and EBITDA grew 22% year-over-year. EBITDA margin grew 270 basis points up to 22.5% from 19.8%, triggering a notable 120 basis points improvement in ROIC compared to the first quarter of 2024.

In addition, we strengthened our liquidity position and debt-to-EBITDA ratio through an improved cash conversion rate. Regarding capital allocation, we will propose a cash dividend payment and an extension of our share repurchase program at our General Shareholders Meeting, which is scheduled for later today. Looking ahead, we reaffirm our full year guidance.

I will now turn the call back to the operator for the question-and-answer session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Lucas Mussi.

[Lucas Mussi, analyst]

Lucas Mussi from Morgan Stanley. A couple of quarters ago, you gave some additional detail on the gross margin uplift. I recall that a couple of quarters ago, about 1/3 of the gross margin expansion was maybe related to lower agave costs. So I just wanted to see if you could provide more color around the breakdown of the gross margin expansion. How much of that can we attribute to a weaker FX, lower agave prices, perhaps a better product mix, and the geographical mix as well? Any color here would be very useful. That's my first question. My second question is, any updates on your guidance? How do you feel about the guidance that you gave about mid-single-digit growth back in the last conference call, given all the new developments around I don't know, tariffs, the economic uncertainty in the U.S. So I just wanted to hear more from you guys about how you're feeling about the guidance today as well.

[Rodrigo de la Maza Serrato, executive]

Thank you, Lucas. This is Rodrigo. Yes, regarding gross margin, we continue to benefit from lower agave costs as indicated since a few quarters ago. I guess, in particular, this quarter in specific was also benefited not only from lower agave cost, but more a better yield in regards to the component of sugar within the agave. Combined with that, we have both improved mix driven by both geographic mix driven by the U.S. performance. And in addition to that, all regions basically performed better from a product mix perspective. So -- and of course, as you know, FX continues to benefit our gross margin as well. So, and yes, in regards to guidance, we continue to sustain our guidance from the previous year. So yes, mid-single-digit growth is what we expect from an NSV perspective.

[Operator]

The question comes from the line of Ben Theurer.

[Benjamin Theurer, analyst]

This is Ben Theurer from Barclays. Just wanted to... I squeeze in 2 questions. So number one, as we look at the performance in the U.S., Luis Felix, maybe one for you and particularly on like kind of like pricing dynamics within the different categories. Can you help us understand a little bit what drove aside from FX, the very strong performance in the quarter? Is it just the mix? Is it selective price increases? How should we think about the key component of pricing in U.S. dollar terms in the U.S. business? And then I have a quick follow-up for Rodrigo.

[Luis Felix, executive]

Thank you, Ben. So in terms of pricing, we did some adjustments in pricing in a couple of brands in key markets, and that has been followed by many companies which are putting pressure. And we've seen a lot of brands taking prices down in a more aggressive way. So we believe in our case, this quarter results was driven by better performance in our tequila business, which helped in terms of the mix. And of course, it was lowered by some decreases in the RTD business that we have, which is important for us. But yes, the pricing pressure remains constant in not only in our tequila business, but also whiskeys, we've seen very aggressive discounting in whiskey as well.

[Benjamin Theurer, analyst]

And then for Rodrigo, as we think about the mid-single-digit growth guidance, just is that assuming FX at current levels at a different level? Any update, anything you can share, like within the framework of mid-single-digit sales growth, what is your FX assumption for the peso-dollar FX rate?

[Rodrigo de la Maza Serrato, executive]

Of course, Ben. And this was a question on the previous quarter as well. As we mentioned, we're not disclosing our FX assumption at this point. There's significant volatility as you've seen in recent months. And so because of that, we're being cautious from that front. So we believe the ups and downs that the current volatile environment will persist, including FX.

So as a result, our guidance remains same as we've disclosed from the previous quarter on a mid-single-digit Mexican peso NSV growth.

[Operator]

Our next question comes from the line of Froylan Mendez.

[Fernando Froylan Mendez Solther, analyst]

Froylan Mendez from JPMorgan. I wanted to understand if you saw, at any degree, preemptive buying from distributors in the U.S. trying to gather some lower-cost inventory given the tariff risks? And if so, how much of the volume do you attribute to this phenomenon? And secondly, we saw the very positive mix effect across regions. How do you explain the weak demand dynamics in most of the regions, with the consumer willing to go to the more premium product? Or what did you saw there in terms of consumer behavior? Just want to understand the positive mix effect when demand is so depressed.

[Shane Hoyne, executive]

Thank you, Froylan. I'll take the first one. In the U.S., the -- yes, we did some shipment from Mexico to the U.S., but mainly in our warehouses. I can tell you that the days on hand that we have with distributors this year is 70 days. And compared to the same time in March of last year, that same number was 73 days. So we basically have 3 days below the days on hand that they carry. And in absolute number, it is only -- I think we have 30,000 cases more than what we have last year. So no increase in preempting tariffs from our distributors.

[Rodrigo de la Maza Serrato, executive]

And Froylan, from your second question, you are correct. I mean mix is positive. Product mix is positive in all regions of the world. And this is primarily driven by strategic intent. It's one of our strategies. It has been through the premiumization strategy for several years, and we continue to pursue that. And despite the market conditions that we see, there are plenty of opportunities to be captured there. So fortunately, what I can share is that, that strategy is working well across regions and it's definitely having an impact on our results that you see this quarter and on the previous quarters as well.

[Unknown Executive]

Froylan, this is Brian. Just a quick example of what we're seeing in the market, especially in the U.S., which is interesting from a consumer perspective, is that we've mentioned that the consumer is pressured financially. And we've been launching along with the industry, smaller formats of many of our major brands in the U.S., a small format of Dobel of 1,800. And what we've been seeing is that the consumer is willing to pay for these smaller formats, meaning that they want to premiumize, they just don't have enough money in terms of discretionary spending towards that. So they're moving towards smaller format presentations. So that for us, at least is a good indication that the consumer wants to premiumize and goes towards these higher-end brands.

[Operator]

Our next question comes from the line of Ulises Argote.

[Ulises Argote Bolio, analyst]

This is Ulises from Santander. I just wanted to double-click there on the volumes in Mexico. And also you obviously discussed and you cited pressure there in the release related to the market contraction. So I just wanted to understand if this is mostly done? Should we still expect kind of the similar dynamics ahead? Or is this something that just because of the comp basis, we'll start seeing improvements ahead? Just to understand a little bit there of the volume outlook, particularly in Mexico.

[Unknown Executive]

Thank you for your question. Well, the market, as you know, is a very volatile market at this moment. So it's really difficult to foresee the future. But one thing that is certain is that the timing of Easter moved from Q1 to Q2, and that really affected the performance of Q1. And we also think that from an industry standpoint, market contraction in the first quarter was in line with what we saw in the second half of 2024. So that said, it's difficult to foresee the future, but we do see a less contracted market in terms of what we had last year. So we still have a contraction, but at a slower rate.

[Ulises Argote Bolio, analyst]

And maybe if I can have another question, this one more for Rodrigo, around the cash flow dynamics. So obviously, we're seeing some definite improvement there. Maybe just wanted to pick your brain if you could share any details with us around the expectations that you might have from that cash flow from operating activities for the rest of the year, how you're seeing kind of the dynamics shaping up there? I know there's a lot of uncertainty, but any color, obviously, would be helpful. Thank you.

[Rodrigo de la Maza Serrato, executive]

Thank you, Ulises. Of course, cash flow dynamics remain positive as we continue to focus on working capital optimization. Pretty much that has become the key driver for the last few quarters, continues to be impacting results this quarter in particular, and we expect to continue gradually improving while, you know, the benefits relative to what we delivered last year and this quarter in particular may be, maybe, let's say, more marginal as we start reaching the standards we're looking for from a working capital investment perspective. But the opportunities remain there. It's across, you know, it's mostly inventories, accounts payable, you know, optimizing commercial terms, both in payables and receivables, etc., that we have been working on, and it's delivering good results.

[Operator]

Our next question comes from the line of Antonio Hernandez.

[Antonio Hernandez, analyst]

This is Antonio Hernandez from Actinver. Just a quick one regarding profitability for how do you see playing out for the remainder of the year given the underlying sales trends and costs and of course the comps that you have for the remainder of the year. Thanks.

[Rodrigo de la Maza Serrato, executive]

Antonio, could you repeat your question, please? It got cut off.

[Antonio Hernandez, analyst]

Sure. It's regarding profitability, how do you see margin levels playing out for the remainder of the year, given the underlying sales trends and costs? Thanks.

[Rodrigo de la Maza Serrato, executive]

Antonio, there are several moving pieces, as you know, in this environment. So, you know, we continue to expect, you know, good performance from a margin standpoint. Especially, obviously, if FX continues to play a role here, but, you know, mix improvements, cost optimization, good control on operating expenses will continue to be our main focus, and we expect, you know, continued sustained positive levels of profitability going forward for the year.

[Operator]

Our next question comes from the line of Renata Cabral. Please state your company name and ask your question.

[Renata Fonseca Cabral Sturani, analyst]

Renata Cabral from Citibank. I have a question regarding the agave prices. So, we've been seeing the agave prices low for a while, and I would like to have your view on how, when that would turn. I mean, if in 2026, 2027, or even later. And based on that, if you think in terms of profitability, you would have benefit until the end of the cycle of the low agave prices. And the second question is related to competitive environment. Do you think that since now the competitive environment, competitors have access to raw material in a low prices, competition would be easy actually when the agave prices go higher? Do you think that market environments can actually become friendly? So, I would like to hear your thoughts on that. Thank you so much.

[Rodrigo de la Maza Serrato, executive]

Yes, Renata. Hi. Yeah, I mean, as you know, low agave prices environment has been already here for at least a year and a half. So, we expect this environment to remain for the next few years. So, we're not expecting any dramatic changes in this environment nor competitive environment for the next years based on agave. There is, the main driver behind the low agave prices today is simply an oversupply of agave. And in this environment, we expect will remain short term.

[Renata Fonseca Cabral Sturani, analyst]

Thank you. Just a follow-up, in terms of profitability, that should continue to benefit the company this year, next year? What are the expectations overall?

[Rodrigo de la Maza Serrato, executive]

Yes, as I've mentioned before, Renata, you know, this low-cost agave environment will continue to benefit Becle and basically all industry producers through the next few years. So, but on top of that, as I mentioned, our focus on continue to, you know, premiumize our portfolio, optimize cost and expense, will continue to be also an important driver and focus for us as management. So, yes, we continue to expect, you know, ongoing improvements in that regard.

[Operator]

Thank you. We have not received any further questions at this point. So, that concludes today's call. You may now disconnect.