Good morning, everyone, and thank you for joining Becle's Q1 unaudited financial results call. During this call, you may hear certain forward-looking statements. These statements may, may relate to our future prospects, developments, and business strategies, and may be identified by the use of terms and phrases such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will, goals, target, strategy, and similar terms and phrases, and may include references to assumptions. Forward-looking statements are based on our current expectations and assumptions regarding our businesses, the economy, and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those in forward-looking statements.
For all the foregoing reasons, you are cautioned against relying on such forward-looking statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Before we begin, we would like to remind you that the figures discussed on the call were prepared in accordance with the International Financial Reporting Standards, or IFRS, and published in the Mexican Stock Exchange. The information for the Q1 of 2024 is preliminary and is provided with understanding that once financial statements are available, updated information will be shared in the appropriate electronic formats.
At this time, we would like to remind you that the participant's lines will be on listen-only mode until the question and answer session. Now, I would like to pass the call to Becle's CEO, Mr. Juan Domingo Beckmann. Please go ahead, sir.
Good morning, everyone, and thank you for joining us today as we discuss Becle's Q1 2024 results. Before going into the numbers and key highlights, I'd like to extend a warm welcome to Rodrigo de la Maza, our newly appointed CFO. We're excited to have him on board and wish him all the success in his new role. Starting with the regional performance in the Q1 , the U.S. and Canada experienced encouraging volume trends and an increase in U.S. dollar net sales compared to the Q1 of 2023.
This growth was primarily driven by the successful execution of our premiumization and pricing strategies, alongside the recovery of our RTD category. On the other hand, the rest of the world region faced persistent pressures on consumer demand due to ongoing economic headwinds. Despite these challenges, demand for our brands remains strong and resilient.
Mexico experienced a challenging Q1 due to market dynamics affecting the spirits industry. Ongoing market contraction led to reduced demand and high inventory levels at retailers. However, we maintain a strong market position, supported by our comprehensive product mix and ongoing premiumization efforts. As the year progresses, we expect our performance to improve, particularly once the market absorbs recent prices and we face more favorable second half comparisons. Turning to gross margins, in the Q1 , we posted a margin of 52.1%, marking a 140 basis point increase from the previous year, despite a 220 basis point negative impact of a strong peso. Price increases across the regions are focused on premiumization and our favor of geographic mix, which benefited from thriving markets like the U.S., helped mitigate the exchange currency impact.
We are also starting to see initial benefits from the reductions in input costs. Overall, we recognize the ongoing challenges presented by macroeconomic and geopolitical factors across several key markets. However, we continue to observe growth trends for the premium tequila category and remain confident in our ability to further leverage this strength and expand our market share in our regions. I now turn the call over to Luis Félix to discuss our U.S. and Canada results in further detail.
Thank you, Juan, and good morning, everyone. The United States and Canada reported a resilient Q1 of 2024, despite challenging headwinds in the region. Kindly note that the results and the following remarks were prepared on a constant currency basis. Net sales value was up 7.1% compared to the Q1 of 2023. This was mainly caused by our premiumization strategy and a 7.7% increase in tequila sales, which benefited from price increase in the Q1 of 2024 versus the same period of 2023. Shipments for the Q1 rose by 5% year-over-year, driven by a 7.7% growth in our tequila category, a notable 9.6% improvement in our ready-to-drink category, which has steadily overcome recent challenges to exceed last year's performance.
Depletions for the quarter fell by low single digits, primarily due to the recent pricing adjustments, as well as distributors increasing their purchases in anticipation of the high net season, seasonal demand typically experienced in the Q2 . Whiskey, whiskeys and our ready-to-drink depletions declined by 10.5% and 11%, respectively, partially upset by a 3.3% increase in tequila depletions. We expect depletions rates to accelerate in the Q2 once distributors and retailers have fully implemented and absorbed the Q1 price increases. Based on the 13-week Nielsen value indicators for the period ended March twenty-third... The aggregated spirits industry grew by 3.8%. Within our portfolio, the tequila segment grew by 6.4%, marginally below the category 7.5% growth rate. Notably, our super premium category increased above the industry.
Additionally, while our whiskey business experienced a decline of 2.3% versus the category's overall increase of 2.7%, we anticipate a potential rebound in the upcoming quarter. Consumer spending remains affected by inflationary pressures, as highlighted by the Proximo NABCA numbers. In the Q1 of 2024, our NABCA consumer value growth reached 2.2%, overperforming the industry average of 1.7% growth. While recognizing the challenges and economic pressures affecting the industry, it's important to note that our product mix remains favorable, with our premium offerings still gaining traction. We remain committed to navigating through this period effectively, and we'll continue focusing on delivering substantial value for our shareholders. I will now turn the call over to Olga Limón to discuss the Mexico and Latin America results.
Thank you, Luis, and good morning, everyone. Mexico has had a challenging Q1 due to a tough comparison with the previous year, as well as facing a difficult market environment. However, thanks to the consistency of our commercial strategy and the strength of our portfolio, we were able to outperform the market and secure total industry share leadership in both volume and value for the first time. In the Q1 of 2024, volume in Mexico decreased by 9.6% year-over-year, primarily driven by a difficult comparison with the previous year, which saw a sustained market expansion and increased demand. We were also impacted by trade destocking, persistent consumer inflation, and a slower demand. This contraction was partially mitigated by growth in various super premium tequila brands, contributing to a positive shift from volume to value.
Despite the 9.6 volume decline, net sales for the quarter only fell by 5.2% due to our favorable product mix and premiumization strategy. Our net sales per case increased by 4.8% in the quarter versus previous year, reflecting our portfolio strategy. Moreover, consistent with our premiumization strategy, our depletions in premium tequilas and mezcal are also experiencing a positive trend, outpacing the industry. Finally, our pricing adjustments in Mexico, although not fully realized in this quarter as they were executed in March, are expected to become more apparent as the year progresses. Going forward, we believe our diversified portfolio and our premiumization strategy will help us manage the market headwinds and continue to outperform the market. I will now turn the call over to Gordon Dron, Managing Director of EMEA and APAC region. Thank you.
Many thanks, Olga, and good morning. During the Q1 , we observed an ongoing economic slowdown with subdued consumer spending across the EMEA and APAC. This was largely driven by ongoing uncertainty surrounding the conflicts in Eastern Europe and the Middle East, persistent consumer price inflation, trade destocking following the year-end, and decreased market confidence from the upcoming months. Within the EMEA, APAC region, depletions grew by 1% compared to the previous year. The main driver was the substantial year-on-year increase in Asia's depletions, indicating the potent effect of price hikes and the shift towards premium products. Shipments decreased by 13% due to the slowdown and trade destocking in EMEA, and a difficult base of comparison in Asia. Last year, we recorded a significant number of shipments in the Q1 of 2023 as markets fully reopened post-COVID and restocked.
This trend is expected to normalize in the forthcoming months. Although Q1 shipments were lower, NSV increased by 3% in the Q1 of 2024 compared to the previous year. This was helped by price increases and ongoing premiumization across the EMEA, APAC region. Focusing on specific categories, tequila depletions in the EMEA, APAC region grew by 9% in volume and 11% in value. Our Irish whiskey grew more, more moderately versus last year, reflecting a renewed focus on this important and expanding category in Asia. Overall, we acknowledge the ongoing economic challenges in EMEA and APAC, explained by the previously mentioned factors.
That said, we believe we are well prepared to adapt this year as it unfolds and make the most of the new opportunities. I will now pass the call over to Rodrigo, who will take you through the financial results.
Thank you, Gordon, and good morning, everyone. It is an honor to address you today as the newly appointed CFO of Becle. As I step into this pivotal role, I want to express my profound commitment to driving positive change within our organization. While it's undeniable that we've encountered challenges recently, I firmly believe that by leveraging our strong commercial focus, plus prudent financial management, we can overcome these hurdles to reach our full potential. My mandate is clear, and that is to accelerate shareholder value by enhancing organizational capability to drive margin expansion, working capital efficiency, cash flow conversion, while improving ROIC.
I look forward to working closely with this talented team on this journey. Turning to the financial results for the Q1 , company reported a 6.5% decrease in consolidated net sales, reaching MXN 9 billion. The decline reflects-
... Foreign currency effects caused by the appreciation of the Mexican peso against the U.S. dollar, plus on a constant currency basis, our top line increased by 1% for the quarter. The company continues to see the valuable results of its premiumization strategy, with a product mix increasing skew towards brands with higher revenues per case and margin. Gross profit for the quarter decreased by 4% to MXN 4.7 million, while gross margin reached 52.1%, increasing by 140 basis points compared to the Q1 of 2023. The increase in gross margin was driven by price increase across the regions, a favorable shift in the product and regional mix, alongside lower input costs. This was partially offset by the negative impact of a stronger peso, which resulted in approximately 220 basis points of margin erosion.
On a constant currency basis, the gross margin would have been 54.3% of sales, which would have marked a 360 basis point expansion year-over-year. The initial benefits of lower third-party agave prices have begun to be reflected on our P&L. After a few quarters of working through our inventory, we have resumed purchasing some agave in the third-party market. We are now beginning to see initial benefits of lower agave costs. We expect this to continue throughout 2024 and positively impact results in the coming years. A&P expenses as a percentage of net sales increased to 20.9% from 20.6%. In the Q1 of 2023, aligning with our full year A&P guidance for 2024.
Distribution expenses also decreased by 20% to MXN 365 million compared to the Q1 of last year, mainly driven by lower freight, warehousing, and logistics costs arising from reduced supply chain constraints. As a percentage of sales, distribution expenses for the quarter decreased to 4.1% from 4.8% in the Q1 of last year. During the Q1 , SG&A expenses increased by 9%, accounting for 11.4% of net sales, compared to 9.7% in the Q1 of last year. This increase was mainly due to an increase in infrastructure and organizational capability. Operating income decreased by 2% for the quarter, while the operating margin increased to 16.8% from 16.1%.
EBITDA for the Q1 was down by 1% year-over-year to MXN 1.8 billion, with an FX-adjusted growth of 16.4%. The EBITDA margin reached 19.8%, a 100 basis points expansion. The net financial results for the Q1 of 2024 was negative by MXN 103 million, compared to a gain of MXN 170 million in the same period of last year. This decline was mainly driven by lower year-over-year non-cash foreign exchange gain, as well as higher interest expenses resulting from additional debt taken in 2023. Q1 consolidated net income decreased by 18% to MXN 1 billion. The net margin was 11.3%, compared to 12.8% in the Q1 of 2023. Earnings per share were MXN 0.28 for the quarter.
As of March 2024, cash and cash equivalents stood at MXN 7.6 billion, while total debt amounted to MXN 23.7 billion. Over the past Q2 , we've successfully reduced our lease-adjusted net debt ratio from 3.2 times to a more favorable 2.6 times. Going forward, we will continue to focus on driving cash flow generation. Regarding capital allocation, we will be proposing a cash dividend payment and share repurchase program extension at our general shareholders meeting, which will be held later today. Looking into our 2024 guidance, we reaffirm our expectation for full year net sales value growth in the mid-single digit range in 2024, assuming an exchange rate of 17.5 pesos per dollar.
Additionally, we estimate our A&P spend to range from 21%-23% of sales, and our 2024 CapEx to fall within the range of $160 million-$180 million. With that, I will now turn the call back to the operator for Q&A. Thank you.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you are dialed in by the telephone, please press star two on your keypad. That's star two on your keypad. If you are dialed in via the web, you may also ask a voice or text question. We acknowledge the questions from Morgan Stanley, Barclays, and Bernstein. Okay, our first question comes from Mr. Ricardo Alves from Morgan Stanley. Please go ahead, sir. Your line is open.
Hey, everyone. Thanks for the call. I have a couple of questions. Impressive, the 52% gross margin, considering the Mexican peso strength. So wanted to ask if you could elaborate a little bit more on the many different drivers for the year-over-year improvement? How much of that could be explained by the stronger U.S. and Canada geographic mix, given that the U.S. surprised us to the upside? I would imagine that that's a component. I don't know if you can quantify the benefits there. We're also surprised by the better unit revenue in Mexico. I don't know if that had a positive impact on your gross margin as well.
And then there's also the agave component, but perhaps, did you see bigger moves as well in other raw materials? I think that you made reference for that, so maybe, a quick update on agave and other raw materials would be helpful as well. So just going deeper on the gross margin evolution, considering the Mexican peso strength. That's the first question. Second question, U.S. volumes. If you could shed some light on the evolution throughout the quarter. Our understanding was that January and February were tougher, but then a big rebound in March. I just wanted to check if that's indeed what happened throughout the quarter, but then more important than that, why, if that's the case, why was March so strong?
I appreciate that the base of March last year was weak, so that's probably one of the reasons. But, when you look forward, did you see any anticipation of volume into the Q2 or any kind of unusual distribution behavior, as we head into the Q2 ? That's the second question. Thanks again for your time.
No, thank you. Well, as I mentioned before, yes, gross margin expansion was quite favorable, despite the fact that FX played against us, quite significantly in the quarter. Given the complexity of our portfolio, what I can say is that, we've executed pricing strategies across markets through Q1, and that is an important contributor to gross margin expansion in the quarter. Additionally, as you well say, there is a geographic component of mix, which was favorable due to the fact that, the U.S. market resulted in improved growth. But also there's a product mix improvement, and that's very much related to premiumization strategy, which continues to do well. And lastly, yes, there is some cost of goods, let's say, benefit that we're starting to show on our numbers.
I would not say that's the most material change, but yes, we've started to see the benefits of lower cost, not only from agave, but also other raw materials, which also have contributed positively to the results as a result of productivity focus and initiatives in different raw materials. For your second question, I will turn it over to Luis.
Thank you. Thank you, Ricardo, for your question. I think you were right. In the case of our shipment for the quarter, March was strong, and was strong because the base of comparison versus last year, if you remember, March last year was probably 20, more than 20% down versus 2022. So we have a lower base of comparison in March. Remember that our shipments take a forward-looking view, and basically, our distributors bought enough inventory to meet their forecast. So, what we're seeing is that, in some cases, our distributors fall short of the forecast as a result of lower than expected demand caused by, in some cases, some destocking in grocery and clubs.
But we expect that the placements will accelerate because we have built in Q2 a very strong commercial plan to beat the market.
Thank you very much.
Okay, thank you very much. Our next question comes from Rahi Parikh from Barclays. Please go ahead, ma'am, your line is open.
Great. First, congrats on the results. On questions first, RTD, as you said, is back in growth after declines in Q1 and Q4 of 2023. What's driving this? RTD, if I'm not mistaken, has been seeing lower price in the last few quarters, along with this one, so I'm just wondering what jumpstarted this quarter's growth. And the second one, why are we seeing more premiumization within Mexico versus U.S., if that's correct? Is this just a function of the wage increase versus U.S.'s more constricted wallet, or do you think there's a fundamental difference between these two demographics? Thank you.
Thank you. RTDs, yes, we did see a rebound in shipments in basically in two of our brands. In and that was caused because again the base of comparison versus the Q1 of last year was weak. So we are seeing, let's say we probably are seeing the lower base of the decline that we experienced in the past. So and we have plans to rebuild one of our our brands in RTD, which is very strong, and we will be launching this in the next quarter. So I think we're prepared for again bringing some news in the RTD business.
Hi, this is Olga here. As for Mexico, we are seeing good results in terms of our premiumization strategy for our company. That, that doesn't mean that this is the way it's happening for the market. We have been consistently having a commercial strategy, strategy that supports this premiumization, and as you can see it for a few years already now, and you can see it reflecting in our current results.
Okay. So, and how do you see the different demographics between Mexico and U.S. in terms of consumers? Are there any strict differences, or you think just in terms of income would be the difference in results, and, and whatever stock is within each country?
No, I mean, I think that, I don't know. There must be differences, but for us, we have a portfolio that addresses all the consumer needs, and we've been focusing on just adding value to our portfolio in the higher price tequila segment, and that's what's really been working for us.
Okay. Thank you.
If I may add-
Yeah.
Remember that the markets have different maturity, specifically in tequila. So tequila is already very large in Mexico, and the way the consumer behaves is different than that of the U.S. So in Mexico, we see a consumer that already understands the flexibility, the heritage of tequila, and that's flowing into the U.S. So there's different demographics, different age groups, and that's reflected in the results of premiumizing as well.
Makes total sense. Thanks so much.
Okay, thank you very much. Our next question comes from Nadine Sarwat from Bernstein. Please go ahead, ma'am. Your line is open.
Yes, thank you. Two questions for me, please. First, we started to see some brands cut pricing in tequila in the U.S. in the scanner data. So I'd be curious to hear what you are seeing today in terms of tequila pricing. How do you expect this to evolve due to the falling price of agave? And can you remind us what your approach is to pricing on a medium-term outlook? And then the second question, can you provide any additional color on the magnitude of gross margin expansion we might expect for the full year?
Very happy to see that Q1 expansion, but if we can take that discussion to the full year, you know, providing color on the puts and takes, and if you could incorporate into your answer, you know, your strategy now from purchasing third parties and agave and how that plays in. Thank you.
Thank you, Nadine. I'll take the first question. Yes, we are seeing some more aggressive pricing actions from some competitors derived from the agave prices. However, we don't anticipate significant impact from lower-priced competitors, and based on the following: after years of enduring headwinds from the high cost of agave, I think the priority from the industry is margin recovery. So this shared objective discourage aggressive movement in pricing among our lower-tier competitors. And also, over the past few years, the industry has focused on premiumization strategies, so we don't believe that a substantial shift in pricing by heavily discounting and lowering prices could undermine these efforts.
Hi. Regarding your second question on gross margin expectations for the full year, of course, we don't disclose our guidance for gross profit or gross margin. Nevertheless, yes, you know, the conditions in the market are well set for improved gross margin sustainability, perhaps a little improvement going forward. But keep in mind that our decisions in terms of how we play with the third party agave market are not short term. So we will continue to focus on sustaining, you know, benefiting from the agave prices that are coming down, without jeopardizing any mid to long-term relations. So thank you.
Thank you.
Okay, thank you very much. Just a reminder, star two for any additional questions. Our next question comes from Mr. Juan José Guzmán from Scotiabank. Please go ahead, sir. Your line is open.
Hi, good morning, everyone, and welcome, Rodrigo. Wish you the best in this new endeavor. Thanks for the space for questions. I have a quick one on my end, talking about premiumization and innovation. We are all well aware that non-alcoholic spirits is a hot category right now, although it's still small. So I very much appreciate if you can give us some color on what's your take on it, and if and how you're exploring this consumer trend, and also, if we could expect some launches from your end soon in this category. That's it. Thank you very much.
I'm sorry, could you repeat? Okay.
So, I'll take it. Thank you, Juan José. I think the non-alcoholic categories it's starting to show up in many categories in the alcohol business. So we are taking a close look at those initiatives and those brands, and we will. And we're closely following their tracking and the consumer expectations and consumer acceptance of those products. So, we're not active on that category right now, but we are taking a close look of the development of this category, which is certainly new.
Okay. Thank you very much.
Okay, thank you very much. We have a follow-up question from Mr. Ricardo Alves from Morgan Stanley. Please go ahead, sir. Your line is open.
Thank you very much for the follow-up, guys. My call dropped, so I'm sorry if this was asked, but going back to Mexico-
... The unit revenue was quite strong, based on, based on our numbers. And, I was wondering if you can break it down in more details, you know, how much of that was pricing? Because we understood that pricing in Mexico took place late in the quarter, so just wanted to perhaps check that, and maybe talk about the magnitude of the move. But then maybe more important, what was the contribution to your unit revenue that was coming from, premium tequila? And then qualitatively speaking, if you can elaborate on that premiumization that is happening in Mexico, you know, what are the brands that you're pushing? Any more qualitative comments on that would be helpful, Mexico mix. Thank you.
As of, we just selectively executed our price increase across several brands, but we will not be seeing this effect right now. We will see it later on the year. So as for the premiumization strategy, we are seeing that our depletions in our premium segments are performing well. So it has to do more with the sales mix that you know has been effectively working for us, and not so much as for price. But we'll later on during the year, we'll see the price effect. So we are happy that we haven't seen any downtrending in our portfolio, and we are seeing that our premium brands are performing better. So that's the reason why we are performing better.
Much appreciated. Thank you again.
Okay, thank you very much. Next question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, sir.
Great. Good morning, everyone, and thanks for taking my questions. Rodrigo, welcome and congrats on your new role. I have two question. The first one, in the last couple of quarters, you have mentioned that you have not participated in the third party agave market, so can you comment if you are already participating or not? And my second question is related to rest of the world, given the strong volume decline, if you can comment if the worst is behind and what is your outlook for coming quarters? Thank you.
Thank you, Fernando, for the question. Yes, as I mentioned previously, we have started participating on the third-party agave market. It is normally a component of our business model. So yes, we've started that. We don't currently see too much benefit of that in our gross margin. It is shown as a benefit, but it's starting to contribute, but it's not a significant portion of it. And we will continue to do that, as we've normally done, so, you know, always. And I don't know if you could repeat the second question for me. I would appreciate it.
Yes, of course.
If I may-
Sure.
On the agave sale.
Yes.
It's just an initial purchasing from a third party market, and it's very little at this point, so it's something important to consider.
Okay, great. Thank you.
This is Gordon. So just as far as the rest of the world and the volume decline, I think two comments to make. Firstly, as we said, depletions are actually up year-on-year. So, it's really more a phasing issue caused by shipments in the back end of last year, because we had long lead times for shipments for tequila into the EMEA, APAC region. So, that shortfall should now therefore be covered, and we would expect that situation not to be so dramatic in the forthcoming.
Great. Perfect. Thank you.
Okay, thank you very much. It looks like we have no further questions. We will now take the opportunity to say thank you, and we'll end the line. Thank you everyone for joining. Have a great day.