Becle, S.A.B. de C.V. (CUERVO) Earnings Call Transcript

Good morning, and thank you for joining Becle's third 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 third quarter of 2026 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.

Good morning, everyone, and thank you for joining us today to discuss Becle's third quarter 2026 results. In a quarter where the industry backdrop remained challenging, our business took meaningful step forward, and we continue to strengthen our position in our key markets. In the U.S., the distributor transition continues to progress and the inventory rebalancing that came with it behind us -- is behind us. In Mexico, we continue to outperform the market despite a deeper industry contraction, supported by the resilience of our Tequila portfolio and our disciplined pricing approach. In rest of the world, consumer demand for our brands in EMEA and APAC continued to grow with Tequila outperforming the wider spirits category in our priority markets, although our reported results for the quarter were affected by phasing effects. Our reported figures also reflect a demanding comparison base and the appreciation of the Mexican peso. Even so, our financial position remains solid and our balance sheet gives us the flexibility to continue investing behind our brands. We remain realistic about the environment. Consumers are still cautious and competition is increasingly centered on price, but we entered the fourth quarter with a stronger commercial platform, clear priorities in every region, and confidence in our ability to return to sustainable profitable growth. With that, I will turn it over to Mauricio Herrera, to walk us through our U.S. and Canada results in greater detail.

Thank you, Juan, and good morning, everyone. The third quarter marked an important milestone for the U.S. and the Canada business. The distributor transition we outlined at the beginning of the year continues to progress and the related inventory rebalancing is behind us. As a result, our performance continued to improve sequentially. Shipments declined 3% during the quarter, a significant improvement from the declines of 23.8% in the first quarter and 8.7% in the second. Depletions increased 0.3% versus the same period last year compared to the declines of 9% and 4.7% in the first and second quarter, respectively. Notably, transition markets grew approximately 4.6% in the quarter, while non-transition markets declined approximately 3.1%. With destocking now behind us, the gap between shipments and depletions continues to narrow. Net sales declined 7.6% in U.S. dollars. From a category standpoint, the industry remains in contraction. And while the decline is less severe than earlier in the year, we're not yet seeing signs of recovery. According to C-store data through August, full-strength spirits depletions declined 5% with Tequila down 3.1%. Within Tequila, consumers are becoming more discerning, favoring brands that offer a stronger value proposition and strong craft credentials. Our portfolio is well-positioned to benefit from this dynamic as we have strengthened the value proposition of some of our brands and continue to see growth in the Ultra-Premium segment. Turning to consumer takeaway. Nielsen data for the 13 weeks ending September '26, shows Proximo Spirits volumes, excluding prepared cocktails, declined 1.8% against a 3.2% decline of the broader market, while our Tequila volumes declined 0.8% versus 3.1% growth of the industry. Importantly, we added 10 basis points of volume share in our core full-strength spirits during the spirits portfolio during the quarter. Tequila remains our main area of focus. It is where our targeted promotional activity is concentrated. While it is early, the initial response is encouraging with our Tequila volumes growing 1.5% over the last 4 weeks, a sign that the trend is moving in the right direction. When we isolate the markets least affected by the transition, the underlying strength of our brands becomes much clearer. In the NABCA or control states, which are the most effective or reflective of true consumer pool, we have delivered share growth in total Tequila in 7 of the first 8 months of the year. Turning to pricing. The environment remains highly competitive as average prices have come down across spirits. Our approach has not changed. We are taking targeted actions to keep our price position aligned with key competitors, mainly through promotional depth and frequency rather than resetting frontline prices. We remain disciplined in our A&P, ensuring every dollar goes where it delivers the highest return. Looking ahead, we expect shipments and depletions to remain closely aligned in the fourth quarter and our share performance to keep moving -- sorry, to keep improving into 2027. While the industry remains challenging, our major markets are returning to growth and the steps we have taken position the business for sustainable long-term growth. I will now turn the call to Olga Limon to discuss the Mexico and Latin America results.

Thank you, Mauricio, and good morning, everyone. Turning to Mexico. The spirits industry remained under pressure during the quarter, and the contraction deepened in an increasingly promotional environment, with August being the industry's weakest month of the year in both volume and value. Against this backdrop, our portfolio continued to outperform the broader market. As in prior quarters, the view of our performance excludes the Boost brand, which materially impacted our volume comparison during the quarter. On an organic basis, our volumes grew 0.3% in the quarter against our toughest comparison of the year as volume grew 18.3% in the third quarter of 2025. Year-to-date, organic volume is up 3.7%. Excluding Boost, net sales value declined 6.4% in the quarter and on a reported basis, net sales value declined 9.3%. According to Nielsen data through August, we continue to outperform the industry across every key metric. In total spirits, our volume declined 2.5% compared to a 6.6% contraction for the industry, while our value declined 6.1% versus an 8.9% for the market. Within Tequila, our volumes declined 1%, while the category fell 3.5%, and our value declined 5.5% against an 8.2% decline for the category. Once again, these results reinforce our leadership position in Mexico. During the quarter, our product mix was less favorable, reflecting the relative strength of our more accessible brands. Across the industry, the decline is broadly based, reaching even the deluxe and prestige tiers, while more affordable products are falling at a slower pace. On a reported basis, our average price per case continued to benefit from the exit of Boost. From a pricing standpoint, competition intensified with some competitors discounting more aggressively in Whiskey and most notably in the Tequila segment, where our position is strongest. We have not made any structural pricing moves and our pricing positioning remains unchanged. In Latin America, results were mainly affected by timing as part of the quarter shipments was delayed by weather conditions and shipped in early October, as well as by softer demand in Colombia. We remain focused on protecting value and further premiumizing our portfolio. With the market still contracting, our priority for the fourth quarter, the most important period of the year is to keep inventories healthy. Overall, the resilience of our Tequila portfolio and our pricing discipline reinforce confidence in sustaining our leadership across Mexico and the broader region. I will now turn the call to Shane Hoyne. Thank you.

Thank you, Olga, and good morning, everyone. Year-to-date Q3, Proximo continues to perform resiliently in the market. Despite increasingly challenging market conditions that have persisted through the year, we see the underlying demand for our brands remain strong. In Europe, the spirits market continues to decline at a mid-single-digit rate as consumers remain under pressure from increasing cost of living. Tequila, however, continues to grow despite the macro conditions affecting our industry. We are seeing strong depletion growth in European markets and taking share in our priority markets. In Asia, we see Tequila continue to grow in value, supporting a healthier mix. This is further driven by distribution gains and strong consumer demand. Across Asia, Tequila outperforms other spirit categories, and we see strong growth and share gains continue in our core markets. In the Middle East, logistics disruptions prevented us from supplying the region during the quarter, but we remain confident in the long-term potential of this region for our super premium brands. In Q3, Proximo depletions grew 2.9%, whilst shipments declined minus 16%. However, on a year-to-date basis, shipments are largely flat, while depletions are up 1.1%. As we have said before, shipments and depletions can move at different paces, but they tend to balance out over the course of the year. Inventory levels across the region remain healthy as we continue to balance our stock holdings. Tequila pricing remains very competitive with increasing depth and frequency of promotion activity across the region. We remain disciplined on price, and we will continue to put healthy inventories ahead of short-term shipments. From a category perspective, Tequila continues to stand out in softer spirits market and our portfolio is capturing that demand. Looking ahead, the fourth quarter remains a key trading period for the region. Shipments and activation plans are in place to succeed. Overall, while the environment remains complex, demand for our brands is resilient with share gains in key markets and Tequila continuing to outperform the wider spirits category. We remain confident in the long-term opportunity for Tequila across EMEA and APAC. I will now turn the call over to Rodrigo de la Maza, who will take you through the financial results.

Thank you, Shane, and good morning, everyone. I will now walk you through the financial results for the third quarter of 2026. The company reported a 15.3% decrease in consolidated net sales, reaching MXN 9.3 billion. This decline reflects unfavorable foreign currency effects from the appreciation of the Mexican peso against the U.S. dollar in the third quarter of 2025. On a constant currency basis, net sales decreased 10.3% or 9.6%, excluding Boost, driven by lower volumes and unfavorable regional price mix. Gross profit decreased 22.8% in the third quarter to MXN 4.7 billion, while gross margin decreased from 56.1% in the third quarter of '25 to 51.1%. The decrease in gross margin was largely driven by unfavorable foreign currency effects and unfavorable geographic mix in a heavier promotional environment. This was partially offset by stable input costs. On a constant currency basis, the gross margin would have decreased 330 basis points from 56.1% to 52.8%, driven by net sales per case pressure. A&P expenses declined 6.6% in the quarter. On a year-to-date basis, A&P stood at 20.2% of net sales within our full year guidance range of 19% to 21%. Distribution expenses decreased 8.2%, representing 4.8% of net sales. SG&A expenses increased 3.3%, representing 12.7% of net sales, reflecting operational deleveraging driven by the decline in net sales value. Operating income decreased 64.4% and operating margin contracted 1,660 basis points from 28.6% to 12%. The third quarter of 2025 included a MXN 753 million gain in other income, mainly from the sale of Boost and contractual settlements related to U.S. distribution agreements. Excluding non-recurring gains from 2025, operating margin would have decreased 800 basis points from 21.7% in '25 to 13.7% in 2026, adjusting for FX. EBITDA for the third quarter declined 57.9% to MXN 1.5 billion and EBITDA margin contracted 1,600 basis points from 31.7% to 15.7%. Excluding the MXN 753 million gain in other income recorded in the third quarter of 2025, the EBITDA margin would have decreased 760 basis points from 24.8% in '25 to 17.2% in '26 on a constant currency basis. The net financial results recorded an expense of MXN 256 million compared to an expense of MXN 24 million in the third quarter of 2025. This variation was primarily driven by a foreign exchange loss of MXN 152 million, reflecting the depreciation of the Mexican peso against the U.S. dollars during the quarter. Compared to a gain of MXN 188 million last year, partially offset by lower interest expense, reflecting our reduced debt levels. Third quarter consolidated net income decreased 84.6% to MXN 633 million, reflecting lower operating income and the gain from asset divestitures recorded in the third quarter of 2025. Excluding the gain from asset divestitures and other income recorded in the third quarter of 2025, net margin would have decreased 790 basis points from 15.9% to 8% on an FX-adjusted basis. Earnings per share were MXN 0.18 compared to MXN 1.15 for the third quarter of 2025. As of September 30, 2026, cash and cash equivalents totaled MXN 11.2 billion, a decrease of MXN 0.8 billion compared to the prior year, while total debt was MXN 19 billion, a decrease of MXN 2.3 billion. In the first 9 months of 2026, the company generated MXN 5.2 billion in net cash from operating activities. Our balance sheet remains strong with adjusted net leverage of 1.3x within our target range of 1x to 1.5x. The increase from 1.1x in the previous quarter mainly reflects the lower EBITDA of the last 12 months. Our capital allocation priorities are unchanged, investing in the business to support long-term growth, sustaining a consistent dividend and preserving financial strength and flexibility. Finally, we are revising our 2026 guidance to mid-single-digit consolidated net sales value decline on a constant currency basis. I will now turn the call back to the operator for the questions-and-answer session. Thanks.

[Operator Instructions] Our first question comes from the line of Nadine Sarwat.

This is Nadine from Bernstein. My question is on Rest of World for the third quarter. You called out shipment timing. Based on what you said for depletions, there seems to be around a 20 percentage point gap in the quarter between shipments and depletions. And in the prepared remarks, you also mentioned that some shipments will be happening in Q4. But then when you mentioned your 9-month performance, it already sounded like shipments were close to depletion. So could you help us understand how we should think about Q4? Should we be expecting a sizable shipment tailwind or should shipments be closer to that 2.9% depletion that you mentioned?

Nadine, this is Shane. I'll take -- thank you for the question. Throughout the year, we see that in certain quarters, we have a gap between shipments and depletions and it tends to level out by each quarter. In quarter 3, our depletions were strong. And in quarter 4, we're already seeing in October, a lot of the late shipments delays from September were picked up in October. So we are expecting a kind of a normalization of business in October as the shipments continue to balance out. We have a lot of plans in place to -- in our European markets, especially a high proportion of our business happens in quarter 4. And we are pretty confident that by the end of the year, we will have normalized our shipments plan against what we expected. Our depletions will continue to grow as we see Tequila continuing to grow in our markets as well. So the performance in Q3 was a -- I would say, it was a month-by-month phasing shipment phasing issue rather than an underlying demand issue on the brand. And we expect that by the end of the year, we'll see a more normalized shipments and depletions profile in our business. And as I mentioned before, we are very confident of a strong depletion performance in Q4.

Got it. Are you able to provide any quantification of the shipments versus depletion? I think a lot of people were hugely surprised by how big the gap was this quarter. And so should we be expecting a catch-up in terms of shipments, so shipments exceeding depletions by a huge amount or them broadly being in line? And I know I'm harping on this, but it's only because I think that's what a lot of people have on their mind today.

Yes. We should definitely see a catch-up in shipments in Q4 that we're clear on. And because we have good foresight on that, we're already seeing in our Asian markets and in a lot of our European markets, our shipments are in place already for Q4 and some of them have departed. So our shipments will catch up. On our depletions, we remain bullish on our depletions profile. We've been performing ahead through the year on it. And I think that we will see slightly more favorable depletions and shipments in Q4 and the year as a whole. We don't -- we do try overall to keep our shipments and depletions quite close. We don't want to be building excessive inventory in the market. But as we remain very confident on our shipments, we remain -- we expect that our depletions will outperform shipments by the end of the year.

Our next question comes from the line of Ben Theurer.

This is Ben Theurer from Barclays. So the first, I wanted to kind of like get a little bit of an understanding if you could elaborate a bit more on the shipment dynamics and just on the transition in the U.S. territory. You've called out a little bit as to territory where you did not face too much of disruption, things are starting to normalize. So as we phase into 2027, what's your expectation in terms of the cadence of normalization of what is just getting product to the customer and the distribution channels, call it, fixed, if you want to call it this way? That would be my first question.

Thank you, Ben. It's Mauricio. Look, as I mentioned, we are already seeing and that's the expectation for Q4, I would say, and even more for 2027, to have our depletions aligned to shipments. So we are done with the destocking that we program at the first of the year to rebalancing our inventories. So I think right now, we're going to close the year at very normalized inventory levels. So for 2027, I don't see any discrepancy in speaking about normal business in both transition and non-transition markets, depletions should equal shipments.

Perfect. And then just coming back to some of the cost items as you look into it. I mean, clearly, we're talking about a lower top line basis that affects SG&A, for example, as it is as a percentage of sales. But we're seeing barely any change here in terms of like trying to do any cost efficiencies and so on. So I was wondering, are there certain opportunities for you guys to get the absolute peso amount lower, particularly in light of a top line that is now with the revised guidance on the softer side. I was just wondering if there are any cost-cutting opportunities that you have, especially as it relates to the selling and administrative fees, but also to a degree, distribution.