Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- United Breweries Ltd (BOM:532478, Financial) reported a 9% increase in net sales for Q1 FY2025.
- Premium volume grew by an impressive 44%, indicating strong demand for higher-end products.
- Overall volume growth was 5%, showing steady market performance.
- The company achieved a significant gross margin improvement of 247 basis points.
- EBIT grew by 29%, reflecting strong operational efficiency and profitability.
Negative Points
- The company faced challenges due to elections, which impacted their ability to move stock between states.
- There were significant market share losses in states like Telangana, Rajasthan, and Orissa due to supply constraints and election restrictions.
- The company is still dealing with collection issues in Telangana, impacting cash flow and working capital.
- There is ongoing volatility in state taxation policies, which could affect future profitability.
- The company is operating at full capacity in several states, necessitating urgent capacity expansion plans.
Q & A Highlights
Q: Congrats on a good set of margins coming back. My first question is on the Heineken in Karnataka. What kind of success or size has Heineken achieved in states like Maharashtra and Goa, and what market size are you looking at in Karnataka?
A: We have had the manufacturing facilities ready for nine months and waited for the permit to produce locally. Heineken is now the world's biggest beer brand, and in Maharashtra and Goa, our sales growth of Heineken is above 40%. We expect Heineken to play a massive role in our portfolio, potentially reaching 7-8% of our total portfolio by 2030.
Q: Would you need Heineken in North India at some stage, given its success in Maharashtra and Karnataka?
A: We are working on launching Heineken in Delhi and already have operations in Rajasthan. We plan to have a strong presence of Heineken in many other markets over the next 12-18 months.
Q: What is your thought process on M&A or craft beer acquisitions, given the current focus on existing business?
A: Currently, our focus is on fixing the basics of our core business. We have a small team evaluating opportunities, but for the next six months, our priority is to stabilize and grow our existing operations.
Q: Will the Beer Association of India focus on specific states, especially where beer tax hikes are higher than spirits?
A: The Beer Association of India has a broader agenda to improve category penetration and economic value. We are focusing on macro issues like economic value, level playing fields, and advertising regulations, while also addressing state-specific issues.
Q: Could you talk about the pros and cons of potentially launching a Heineken Strong brand and Heineken Zero over the medium term?
A: Our current focus is on expanding Heineken Silver and Heineken Original. We are importing Heineken 0.0 and working on strengthening our go-to-market strategy for it. We believe there is a long-term market for 0.0, but consumer understanding is still a barrier.
Q: What percentage of your sales and volumes are Heineken, and are you planning on bringing it to more states this financial year?
A: Heineken's percentage of sales is small but significant in premium markets. We plan to expand Heineken to at least four more states in the next 9-12 months, leveraging our manufacturing capacity in Karnataka and Rajasthan.
Q: What is the planned CapEx for increasing capacity, and which states are you focusing on?
A: We are evaluating capacity expansion in states like West Bengal, Telangana, Rajasthan, and Orissa. We are working on various models, including improving existing operations and exploring high gravity brewing. The board is aligned on providing the necessary CapEx.
Q: How has inflation in glass bottle prices and bottle return rates impacted your margins?
A: We had a tailwind from lower barley and malt costs, with modest inflation in bottles and cans. We are improving bottle return rates, which positively impacts our gross margins. However, we are not yet at pre-COVID levels.
Q: What is your initial sense of the ideal steady-state EBITDA margin for United Breweries over the next 2-3 years?
A: We aim for high single-digit volume growth and double-digit revenue growth. We believe achieving 10-11% EBIT margins over the next 2-3 years is realistic, given our current operating margin of around 6%.
Q: How are you planning to address the affordability issue of beer compared to spirits, and what role does strong beer play in your strategy?
A: Affordability is a key barrier, and we are working with governments to make beer more affordable. Strong beer continues to grow, and we are designing innovations in the premium strong segment. We aim to encourage moderation and make beer more sessionable.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
