United Spirits Q1FY13 Earnings Conference Call - July ... - UB Group

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United SpiritsJuly 31, 2012Moderator:Ladies and gentlemen good day and welcome to the United Spirits Q1FY13 earningsconference call hosted by CLSA India Limited. As a remainder, all participant lines will be inthe listen-only mode and there will be an opportunity for you to ask questions at the end oftoday’s presentation. If you should need assistance during the conference call, please signal anoperator by pressing * followed by 0 on your touchtone telephone. Please note that thisconference is being recorded. I will now like to handover the conference to Mr. VivekMaheshwari from CLSA. Thank you and over to you sir.Vivek Maheshwari:Thanks Marina. Good evening everyone and thanks for joining us on United Spirits Firstquarter conference call. We have with us from the United Spirits today Mr. Ashok Capoor –Managing Director; Mr. Ravi Nedungadi – Group CFO; Mr. P.A. Murali – CFO and Mr.Suresh Menon – EVP (Planning). We will start the call with brief remarks from the UnitedSpirits management and will open the house for Q&A thereafter. I will handover the floor tofirst Mr. Nedungadi. Over to you sir.Ravi Nedungadi:Thanks Vivek; thanks everybody for joining in on this call. Just a very quick overview from myside as you would have all seen there has been a distinct change in emphasis in the way UnitedSpirits has gone about its business. As Ashok will explain to you immediately after this, hisfocus have moved more and more something that we started years ago, but now the totalemphasis is on operating profitability and improving margins, completely deemphasizing thevolumes. I have seen some of the reports in the media and among analyst drawing attention tothe fact that the headline volume growth seems to be not as in the past in double digits, but asAshok will explain this is part of a deliberate policy when we are looking at a base which is soenormous that USL already has, the more that we talk about percentage growth, moremeaningless that becomes because even a 1% growth on a 125 billion base is an enormousabsolute number with all the pressure that we all know are there in the environment in terms ofthe ability to get pricing in terms of the underlying costs which are creeping inevitably upward.The management has chosen that we believe more rightly to focus more and more only onprofitable and if necessary to sacrifice volumes in certain territories in order to get an improvedproduct mix. Ashok and Murali will also explain how going forward; they will explain howdespite contrary indication we have been able to keep input prices particularly raw materialprices under control. They will explain us some of the investments that we have done recentlyinto primary distillation is only now beginning to tail back and during the rest of the year andgoing forward this will help to further maintain control and input costs which will be the key tofuture profitability. So with this, I will request Ashok to give an overview of the business andthen Murali can talk about the numbers in greater details.Ashok Capoor:Good afternoon everyone, this is Ashok Capoor here, the first quarter as Ravi has rightlypointed out, our volume growth has being 2% which seems very low but there will be overallcontext of large base is reasonable. There has been a distinct shift in our approach in last oneyear more distinctly to move value rather than volume and we have de-focused on brandsPage 2 of 20
United SpiritsJuly 31, 2012which are contributing very low margins to us and we have started focusing purely on thebrands which makes higher margin which is Prestige and above where the growths have been inthe first quarter, more than 17% and we have been able to significantly improve our marketshare position in relevant profitable segments. The revenue growth has been 6.3% and there is atotal 122 crores above last year and is currently 2057 crores. The EBITDA has moved up by 11crores to 351 crores from 339 crores last year. So, overall I think the performance within thecircumstances of very severe cost push, which is thanks to ENA and glass prices, has beenquite satisfying. This is despite certain markets which have not done well, which is TamilNadu, where there has been a disruption in supplies that they have kept our orders to only about8-lakh cases and we do not have adequate capacities to fill up that demand which we are nowworking aggressively and hopefully we should be able to see better volumes in the secondquarter and there is another market called West Bengal where because of very sharp increase inlast year, in excise there has been a drop in volumes which are going to dampen our volumes inthe first six months, but the last six months we will be looking healthier and Bengal by the endof the year will also be showing double digit volume growth. Apart from Orissa also as amarket has taken a slight dip in the first quarter and that is due to disruption in the overallbureaucracy in Orissa, where there has been three changes of excise commissioners andmanaging directors and that had led to some disruption and the industry has taken a 7% degrowthin the first quarter. Otherwise, the product continues to be healthy and spirit cost aredown if you take the full year average. But in the first quarter, basically because UP has startedin full swing and UP rates are relatively stable and below but if we take it compared to the lastyear first quarter it is above last year first quarter and also there is because of this and we havetaken price increases in the first quarter and we plan to take further price increases which arenow hitting us in Kerala and Andhra Pradesh which should substantially improve our margingoing forward because of various factors EBITDA margin is approximately up by 650 basispoints over the immediate preceding quarter and 290 basis points over the average of ‘11-12.The increase is basically a manifestation of the price increases which we have taken at varyingpoints during the ‘11-12 and also during the current quarter and also because of thesepremiumization efforts of our company. As has been the practice in the past, revenueenhancement measures are basically a combination in the increase in billing prices, theintroduction of higher priced, alternative brands and also we have cut what we call as fray 8.20spends which is a local promotion spend. The company's flagship brand is McDowell No. 1which has registered a healthy 16% growth in the first quarter, other brands also which are inthe higher price points are registering healthy growth. Royal challenge has grown by 27%.Signature also has grown in double digit. So, all the Prestige and above brands which is theprofitable part of the business has grown by more than 17% and we have been able to gainshare in all the relevant profitable segments. We also in this quarter introduced Premiumbrandy in Kerala called Louis Vernant where Brandy consumption is very large and the initialresponse is overwhelming in fact we are unable to supply the market. It is growing so well. Weare going through slowly but surely extend these brands into other markets brandy markets ofsouth. This obviously again is continuation with our overall premiumization strategy for USL.Interest costs are up by about 165 crores, is a basically a consequence of increased borrowingsPage 3 of 20
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United Spirits Q1FY13 Earnings Conference Call - July ... - UB Group

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