UBLNSEQ2 FY2022October 29, 2022

United Breweries Limited

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Management on call

Harit Kapoor

INVESTEC CAPITAL SERVICES

Radovan Sikorsky

DIRECTOR & CHIEF

P. A. Poonacha

FINANCE & INVESTOR

Key numbers — 32 extracted

23%

tions later on. So just taking you through the Q2 a little bit. In terms of volume growth, we had 23% in the quarter V/s the prior year, primarily driven by Rajasthan, West Bengal and Telangana, that

48%

strong volume performance. The premium segment grew also ahead of the total portfolio growing at 48% while the total portfolio was around 23%, so a nice growth in the premium segment. EBIT for the q

58%

al portfolio was around 23%, so a nice growth in the premium segment. EBIT for the quarter was at 58% driven by volumes, price increase, but softened a bit by negative state mix. Inflationary pressur

508 basis point

d to impact gross margins as you can see from the financials contributing to a decline of about 508 basis points to 46.7 as we have in the financials. Strong revenue growth combined with the cost control thoug

277 basis point

s. Strong revenue growth combined with the cost control though drove EBIT margins growth by about 277 basis points. Now on the next page of the summary table with its quarterly results you can see the net sale

18%

the next page of the summary table with its quarterly results you can see the net sales are up by 18%, EBIT is up 58%, and a margin of 10.8%. On the regional volume growth, we have seen a strong reco

10.8%

th its quarterly results you can see the net sales are up by 18%, EBIT is up 58%, and a margin of 10.8%. On the regional volume growth, we have seen a strong recovery of volume as I mentioned a 23% gro

67%

the COVID affected prior year across all markets and when you look at the year-to-date results 67% growth versus all markets, so that is a nice healthy growth. If we look at the particular regions

15%

markets, so that is a nice healthy growth. If we look at the particular regions, the North posted 15% driven by growth in Rajasthan, Haryana, and Uttar Pradesh. The West posted 22%, the growth driven

22%

, the North posted 15% driven by growth in Rajasthan, Haryana, and Uttar Pradesh. The West posted 22%, the growth driven by higher volumes in Maharashtra state, I still have to get used to saying som

52%

some of these states so bear with me, also in Goa, Madhya Pradesh and Silvasa. The East recorded 52%, growth driven by higher volumes and in West Bengal and in the South we posted 21%,

21%

52%, growth driven by higher volumes and in West Bengal and in the South we posted 21%, growth driven by high volumes in Telangana, Karnataka, Tamil Nadu and Kerala as well. Turning

Guidance — 20 items

Radovan Sikorsky

opening

“Poonacha and together with him I will be answering some of the questions later on.”

Radovan Sikorsky

opening

“If we look at the trend going forward, we continue to be positive about the category penetration while at the same time driving shares in our premium portfolio and that is key for us.”

Radovan Sikorsky

“If I understood you correct, sorry I am not hearing very well through the sound, but if I understood your question correctly you are asking about the commodity prices for example like barley and how do we see that going forward is that correct?”

Radovan Sikorsky

“We will still see some of that continuing going forward.”

Radovan Sikorsky

“Yes there seems to be some softening on some of these components, but going forward I think it is still too early for us to comment on that, so I still think that pressures on margins will remain and it is a little dependent on our ability to increase prices and also manage our cost to try and mitigate any of that.”

Jaykumar Doshi

“Do you have plans to launch the product in other states some time later this year or when do you intend to take it to other key states?”

Radovan Sikorsky

“We are looking at that as well and we will be doing that.”

Himanshu

“Sir can you help me what will be your market share during the quarter and last quarter also?”

P. A. Poonacha

“As you know there have been a lot of initiatives with respect to cost cutting, now that are margins are squeezed because of the inflationary pressures, so the level we are at, is what will stand going forward.”

P. A. Poonacha

“You cannot see anything better, but the level at which we are will be what we will see going forward?”

Risks & concerns — 15 flagged

Inflationary pressure on cost of sales continued to impact gross margins as you can see from the financials contributing to a decline of about 508 basis points to 46.7 as we have in the financials.

— Radovan Sikorsky

Inflation pressure on cost of goods sold will most likely continue in the foreseeable future and hence we will continue to pursue with further price increases to strengthen our earning, in combination with cost measures to mitigate these cost impacts.

— Radovan Sikorsky

Sure and last question is on the gross margin pressure which is quite common for every company so essentially when do you see good recovery here in terms of barley and packaging material?

— Avneesh Roy

Will it be more FY2024 and H2 will remain under reasonable pressure in terms of margin?

— Avneesh Roy

So true as you can see in our margins there is pressure on our commodities and I think that is a global phenomena.

— Radovan Sikorsky

Understood that is helpful and final one your notes to accounts indicate that there is no impact in Tamil Nadu and Andhra Pradesh because of the changes that you have introduced and I guess it is almost more than three to four months now so should we assume that this is a steady state now and there will not be any disruption in those markets or any adverse impact on volumes or are you still cautious?

— Jaykumar Doshi

Okay and secondly other expenses have gone down on a Y-o-Y basis by 3% and this is despite a 23% volume growth on a Y-o-Y basis and there has also been inflationary pressure on freight, etc., front so what is driving this decline in other expenses during the quarter?

— Himanshu

Okay and Sir what are the initiatives which are driving such significant decline if you can just highlight a few of them?

— Himanshu

Yes decline in costs in other expenses line item?

— Himanshu

In terms of gross profit margins and the impact of the growing premium, apart from main stream so we are also looking at driving more margin via premium, but currently premium is still at quite a small scale, also the pricing is a challenge there, because of the smaller scale we need to work through that in terms of cost of sales for the premium brands in order to improve those margins, but that will come with scale, no doubt about it and it will help our gross margins.

— Radovan Sikorsky

It is just that as we now currently under inflationary pressures that are seen across the globe, hence we are a bit under pressure with gross margins and taking up prices in India, we try and do what we can State by State and we will continue to do that, but sometimes it is a little bit more difficult in certain states to take pricing and therefore there can be a bit of delay in catching up on some of the cost of sales growth.

— Radovan Sikorsky

There has been a slight dip recently in the markets, but the pressure still remains and the prices are definitely higher than they used to be in the previous years.

— Radovan Sikorsky

It is still difficult to tell in these volatile times what is going to happen.

— Radovan Sikorsky

You see the decline, we are aware of that and we are working with our teams in terms of procuring at the right prices, getting the best prices, securing supply and also having quality supply.

— Radovan Sikorsky

It is difficult to say at the moment how long it will sustain, but like I said there could be some shoots of hope going into 2023, but at the moment it is still anyone’s guess in terms of that.

— Radovan Sikorsky

Q&A — 11 exchanges

Thanks. The first question is one of your competitors have recently acquired Beer Cafe does this in any way limit your presence or sales in that retail chain and globally is this common that if a brand acquires the retail chain also and would you also have some thoughts on this longer term?

P. A. Poonacha

You are talking about the Bira acquisition of Beer Café, right? Yes? Beer Cafe is like a pub restaurant business. What they do is not like a brew pub, while the brew pub is a new concept as you know it is a less than a decade old and it is a very small niche segment and as such it expands the beer business, but for our business we are currently not looking at that pub space because like a brewpub business is a very different business. Considering that Bira has limited clout in the root to market, I think they are trying to use this as a root to market. Your presence and sales is Beer Cafe does

Good afternoon and thanks for the opportunity. Could you provide an update on some early indicators or response to Heineken Sliver launch how does it compare versus your earlier launches of Amstel and Heineken Original any numbers or any color could be helpful?

Radovan Sikorsky

So it is very early days really because we just launched recently but we have received very good feedback and also responses through social media in terms of the big launch we did in Bengaluru a few days back. In terms of distribution in outlets, it is on track. We have selected certain outlets and areas where we want Heineken Sliver to be. That seems to be going very well, but it is a little bit too early to say. The rate of sales seems to be good as well with repeat buying but it is still quite small, so I think to give you a bit more comprehensive feedback, I think we need a few more months

Sir what is the volume growth on September 19 base and second did we get any price increase between Q1 and Q2 in any of the states and if you could call to the blended price increase?

Radovan Sikorsky

Okay I heard the first part of the question so I will answer that one and may be you can just repeat, because of the bad audio, you wanted to ask about how we are comparing volumes versus 2019, is that correct yes? Yes that is the first question yes? So if we look at volumes versus 2019 in the quarter we were slightly down at around 4% versus 2019, but a lot of the impacted is on account of Andhra Pradesh, in terms of this policy change that happened there about a year ago so it is impacted by that and if you look at the other states there is also a good growth versus 2019, but still on a year

Thank you Sir. Thanks for the opportunity. Sir can you help me what will be your market share during the quarter and last quarter also?

Radovan Sikorsky

Total market share. Yes total market share? The market share is around 51% plus. What would it be Sir in the last quarter? Similar. We do not give the exact number because it is basically done on approximation based on data available and after the CCI order, we do not track market share specifically in many states other than where it is available in the government cooperation websites. Okay and secondly other expenses have gone down on a Y-o-Y basis by 3% and this is despite a 23% volume growth on a Y-o-Y basis and there has also been inflationary pressure on freight, etc., front so what is dr

My question is on I again see that West Bengal and Haryana this quarter doing handsomely? Now in that states like UP, West Bengal and Haryana because of differential taxation between beer and spirit are we also seeing a pickup in the erstwhile non seasonal consumption of beer as well because beer is relatively cheaper than spirits in the states.

P. A. Poonacha

I mean we are better off in West Bengal than we are in the past because the gap between the pricing of spirits and beer vis-à-vis alcohol content has now narrowed down so we are looking at better time now but still spirits are favorably taxed. If you compare alcohol volume by volume, spirits are taxed far lower than what beer is so we cannot say that we are fully out of the woods, but we are better off than what we were. Okay that is useful. My question was more is the seasonality of beer consumption also reducing a bit compared to the past in these states? Seasonality yes. Like I said the pri

Thanks for the opportunity. Sir my question is a little more medium term rather than welcome to United Breweries I wanted to just check with you is there going to be disproportionate focus to drive the premium part of the portfolio now which is also witnessing more competition and does not in that process you would kind of put lesser focus on the mass beer segment and a related question is in that context how should one think about profitability? UBL had generated almost 16% to 17% operating margins in the past? We are now currently hovering between 12% to 13%, there is a lot of gross margin p

Radovan Sikorsky

So I will take that one, thank you for the question. So in terms of premium, we can see that there is appetite for premium products also in India and we want to be strong in that segment as the leader. So disproportionate growth, well yes, we for sure we would like to achieve that. Lose focus on our main-stream, definitely not. Kingfisher remains the bread and butter of our company and it is an extremely important brand for us so the focus remains. Actually, when we look going-forward we will continue doing strong activities around the Kingfisher brand so that needs to be clear. As you know we

Thanks for the opportunity Sir. Just one clarification on the volume growth versus pre COVID so when you had called out 8% growth over pre-COVID in 1Q was AP impact in the base then as well and excluding AP what would be the growth will it be possible to call that out please?

Radovan Sikorsky

Sorry I did not hear that properly. Poonacha can you try. I will just give you a vis-à-vis 2019 Andhra Pradesh used to be 6% of our volume salience with the drop seen because of the change in policies there, it is down to 3% of our volume salience. Okay got it thank you and just one more question. Usually we complete the buying of barley for the year in advance? Is that now done till the next peak season and how much higher is the purchase price for say this year versus last year? If I understood correctly you are asking how secure is our barley till the end of the year or for this year is tha

Thanks for taking my question. My question is around the Heineken Silver launch which was there? Do you not think there could be some kind of cannibalization in the economical premium category because Kingfisher is around the same price point your thoughts on that please?

Radovan Sikorsky

I guess you are talking against price points versus ultra. The way we approach it is also different consumers choose different brands, Silver is also quite a bit marked for the younger sort of consumer sort of the 25 to 30 category or 20 to 30 category so I think we feel that there is a place for both brands in the market, particularly with the fact of how quickly premium is growing so the opportunity exists for both brands to work together in a growing market so I am optimistic for both. So you do not believe growth for Heineken Silver will come at the cost of loss for Kingfisher Ultra or som

Thank you. I just wanted to understand or hear your thoughts on the operating margin profile of the company for the next two to three years assuming that the gross margins revert back to the 2018-2019 levels and the kind of sales that you are doing currently are sustainable? Would you rather see a better margin profile or would you put all those back into growing the premium portfolio or the other new launches that you do?

Radovan Sikorsky

Of course, we want to grow our operating profit margins going forward and I am not going to really comment on what we believe the margins will be in two to three years time. It is a little bit difficult. We do internally forecast that. It is based on what we know. Like I mentioned in terms of the gross profit margins. You see the decline, we are aware of that and we are working with our teams in terms of procuring at the right prices, getting the best prices, securing supply and also having quality supply. It is difficult to say at the moment how long it will sustain, but like I said there cou

Thanks for the opportunity. When I look at your volumes in the first six months of this financial year, it is marginally higher than the same period of 2019 and you just called out that we have gained market share so it implies that overall beer industry volumes have barely grown versus pre-pandemic level in this six month period? When we look across other categories, we have seen pent up demand and much higher growth rates so why do you think this category has not seen any pent up demand at all and why is it lagging most other consumption categories wherein prior to pandemic this category was

Radovan Sikorsky

So like Poonacha mentioned, yes in terms of market share, we are broadly flat right year-to- date so the market we see growing at around 3% in total industry. I cannot compare to others categories because I do not have the facts, but I think looking at our industry we also just need to bear in mind the impact that policy changes have on the market, correct, so I think Poonacha mentioned earlier, a market like Andhra Pradesh which was a big volume for us in the past, due to the policy change, there has been a significant decline in the volumes and I think it is in the region of 70%, so you need

Thank you Michelle. On behalf of Investec Capital Services would like to thank the management of United Breweries for taking out time for this call as well would like to thank all the participants for joining into this call. I would now like to hand over to Radovan for his closing comments. Over to Radovan.

Radovan Sikorsky

Yes, thank you and hopefully next time when we have this call, I will be in Bengaluru and I will have a better audio connection because it has been difficult calling from London through a mobile phone and hopefully I can catch up with a lot of you. Just on closing, like I said, yes there is pressure on margins, but we as a business, we will manage that, going forward in terms of what we can do with pricing, cost, etc., and with our brands. We have strong brands in place so we have the ability to play and grow the category going forward and on that we remain optimistic that the category will co

Speaking time

Radovan Sikorsky

P. A. Poonacha

Moderator

Jaykumar Doshi

Himanshu

Avneesh Roy

Pritesh Chheda

Krishnan S

Litika Chopra

Pratik Rangnekar

Opening remarks

Harit Kapoor

Thanks Michelle. On behalf of Investec Capital Services, I would like to welcome you all to this call and a special welcome to the team at United Breweries for their Q2 FY2023 earnings call. From the management team today we have Mr. Radovan Sikorsky, Director and CFO at United Breweries and Mr. P. A. Poonacha from finance and investor relations. I will now hand over to Radovan for opening comments post which we will open the floor for Q&A. Over to you Radovan.

Radovan Sikorsky

Good afternoon, to everyone on the call, thank you for joining. I am here together with Mr. Poonacha and together with him I will be answering some of the questions later on. So just taking you through the Q2 a little bit. In terms of volume growth, we had 23% in the quarter V/s the prior year, primarily driven by Rajasthan, West Bengal and Telangana, that is really a good strong volume performance. The premium segment grew also ahead of the total portfolio growing at 48% while the total portfolio was around 23%, so a nice growth in the premium segment. EBIT for the quarter was at 58% driven by volumes, price increase, but softened a bit by negative state mix. Inflationary pressure on cost of sales continued to impact gross margins as you can see from the financials contributing to a decline of about 508 basis points to 46.7 as we have in the financials. Strong revenue growth combined with the cost control though drove EBIT margins growth by about 277 basis points. Now on the next page

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