Operator: Ladies and gentlemen, good day, and welcome to the United Breweries Limited Q2 FY27 financial earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Jorn Kersten, CFO. Thank you, and over to you, sir.
Jorn Kersten: Thank you, and good afternoon, everyone. Thank you for joining us for United Breweries' Q2 earnings call for FY27. Before we get into the detail and answer your questions, we are, of course, very happy with the performance in this quarter. I would like to put it into the context of the journey that we have been discussing with you over the past several quarters, as well as earlier this quarter in our Capital Markets Day. When we started this year at the end of FY26, we saw that the beer category was returning to double-digit growth. At the same time, of course, we faced a significant external shock from the developments in the Middle East. In the previous quarter, we saw that those realities were both very visible in our results.
Jorn Kersten: The beer category continuing to accelerate, and our selling also growing with 13% in the previous quarter. We deliberately reduced inventories by approximately 20% to make sure that we were focusing on delivering cash and working capital improvements. However, gross margin came under pressure from the higher input costs. Despite that, we stayed the course, and we have always said we would continue to invest in category growth and behind our brands. During the event earlier in September, our Capital Markets Day, we took a bit of a longer-term perspective to bring you further on the journey, and we spoke about the structural attractiveness of the Indian beer category, the opportunity for us to accelerate premiumization, and very importantly, and to many of the questions asked, what is our ambition to translate growth into sustainably higher profitability with disciplined revenue management as well as productivity across the P&L.
Jorn Kersten: Now, to get through this quarter, Q2 provides for us, and hopefully as well for our stakeholders, encouraging evidence that our strategic priorities are translating into the P&L and into value creation. Our volumes grew 16% year-on-year, while net sales increased by 24%. Premium volumes grew by 38%, which is a significant acceleration from the previous quarter, led by Heineken Silver growing at 67%, as well as the Ultra portfolio doing well with a 44% growth. At EBITDA, we grew 108%, and our EBITDA margin increased by 480 basis points to 11.9%. Last but not least, EBIT grew 151%, with EBIT margin reaching 8.4%. That represents a significant improvement from Q1 when we had volume growth of 9%, net sales of 7%, and where the external cost environment contributed to 155 basis point reduction in gross margin. So it is quite a different story this quarter.
Jorn Kersten: Let me spend a moment on what I think is the most important question behind these numbers. How much of this is sustainable? I think it is important that we do not look at Q2 as the new quarterly run rate, but equally, we should also not view the improvement as simply the consequence of easy comparables from last year or one-off benefits. There are several elements in the quarter which we consider structural improvements. First of all, there is pricing, and we have mentioned this before, driven also by external developments. We have taken pricing actions across 24 markets. That is a higher number than we have ever done with UBL. The benefit from this disciplined revenue management is increasingly visible in our results, as all of these pricing efforts are now visible in our P&L.
Jorn Kersten: Then secondly, it is on premiumisation, which we mentioned as one of the big levers for driving long-term profitability. The 38% growth in premium volume is not isolated for a quarter, but it is an acceleration of the portfolio transformation. We have been continuously investing behind our brands for multiple periods, and now premium markets continue to be accretive to the total portfolio. Third, and also this was mentioned in the Capital Markets Day, our geographic and portfolio choices are increasingly focusing on profitable growth rather than only going after volume or market share. Last but not least, productivity and tight cost discipline is becoming embedded more and more across the organization.
Jorn Kersten: Hold this together, our estimation is that these structural interventions contribute approximately INR 100 crores to our quarterly EBIT, whilst we still continue to partially invest in a higher commercial spend. We still foresee, let us not forget, we are not out of the woods, that our input costs are impacted by sustained input cost increases. There are volume and market effects as well, which are particularly supported in the quarter. We see continued growth in the beer category on double digits, supported by strong consumer demand, which stays high, as well as positive regulatory developments in a number of important markets. We all know the change in policy in Karnataka, which happened midway the previous quarter, and now we see a full quarter of results trickling through, as well as positive continued development in Maharashtra and Jharkhand.
Jorn Kersten: We think particularly benefit from policy and retail market changes, and it reinforces our confidence in the longer-term opportunity for the beer category. But the magnitude that we have seen in this quarter is not automatically to be extrapolated as becoming the new standard. The low comparison versus last year, which was heavily impacted by the weather, also helped for significant growth in this quarter. But the structural impact of changes in the category is also happening. Volume grew 6.2% on a three-year stack and 6% on a two-year stack. So even if we include that long return, we see very positive growth in line with our expectations for the category development. Lastly, I do not want to go without mentioning the non-recurring items.
Jorn Kersten: Most importantly, our reported profit in the quarter included approximately INR 36 crores of interest income relating to an income tax refund, which lands in other income.
Jorn Kersten: This benefits the quarter, but is clearly not part of underlying operating disciplines. Excluding this one-off, the EBITDA margin still expands with approximately 330 basis points. Our operating profit for the quarter was approximately INR 176 crores versus last year's INR 81 crores. In other words, while the headline contains meaningful non-recurring benefits, the underlying improvements we really feel remain substantial. That is also how we want to guide the interpretation of Q2. It is not a quarterly earnings level that should be extrapolated, but it is for us evidence that the underlying economics of the business are really improving. We should also be clear, and we have been clear about this in the past as well, that this is not a linear path.
Jorn Kersten: What matters is the trajectory across multiple quarters, and for us as UBL to believe that our strategy is the right one and that we stay the course.
Jorn Kersten: In the beginning of this calendar year, like I mentioned, beer category growth returns double-digit, and our premium portfolio was at 16% growth. In the previous quarter to this one, category momentum accelerated further, and we deliberately made some choices, especially on cash and cash discipline, to make sure that we were ready to absorb whatever shocks we expected from the external developments. In this quarter ending in September, we have demonstrated much stronger conversion of our top-line growth into earnings, which is a very positive development that we really welcome. As we move into the next quarter, I would like to mention that we expect that commercial investments will normalize from a relatively low base, and we see some of the higher raw material costs will come through into the P&L. Items like sugar, we see increased pricing.
Jorn Kersten: In addition, preparing for peak season, we will stay with the investments behind our brands as well as our breweries to make sure that we are ready for next year's summer. As a consequence, we do expect profitability growth to moderate sequentially versus this quarter. In our view, that is not a reversal of the underlying progress we are making on pricing, premiumization, productivity, and the portfolio choices. In fact, we actually believe that that progression is consistent with the strategy that we presented during the Capital Markets Day. Grow the beer category, accelerate premiumization, improve the quality of revenue, and translate growth into structurally higher profitability through productivity and disciplined execution still is the way to go. We are extremely pleased with the quarter. We remain very disciplined on how we interpret it. One strong quarter doesn't establish a trend.
Jorn Kersten: It gives us a lot of confidence that several of the drivers behind the quarter are the same strategic and operational levers that we have been building over time and that now start showing results. We remain extremely focused on executing against these levers while we navigate the inevitable volatility that will always be here, whether it is commodity costs, regulations, weather, or individual state developments. With that being said, I am happy to hand over Vivek to talk a bit more in detail about the category of the brands. Before we go to the Q&A, I will pick it up because there are a few questions that we anticipate that we will dive into a bit more before we open up for questions. Vivek, let's go to you first.
Vivek Gupta: Yeah. No, thanks, Jorn, and thank you for this. Thank you for giving the overall perspective. I would just highlight a few things. I think some of you joined us in the Capital Markets Day. I think that this quarter results is a clear indicator that those choices are working. A few of the choices which are really working, number one, we talked about we want to be the category maker. I think it is a clear data which shows that the states which actually went through a differentiation policy on beer and better corporate affairs policy have better category growth. Karnataka is growing more than 50% on beer. Jharkhand is growing more than 40% on beer because of retail. Maharashtra continues to grow.
Vivek Gupta: This is extremely important because a lot of it can be seen on the weather, but it is not weather, because not every state is growing at that level, and there is a clear distinction in the states which are growing disproportionate growth versus others. The path to success of creating beer category is very clear. It is about affordability, availability, and the clear tax differentiation. Second thing is the strength of our portfolio. You guys heard me talk about our bullishness on premiumisation. This is something not new we are talking because in the calendar year 2024, we grew our beer business more than 25%. Last year we grew at 23%, and this year we are on the similar trajectory. This quarter we grew 37%. Heineken Silver brand grew 67%. The brand is on fire.
Vivek Gupta: This is the most valuable beer brand in the world, and we are only in 11 states. As we are expanding state by state, the opportunity is huge, and we are just scratching the surface. We now, with Heineken Silver, found the right product in the Indian market, which can actually drive the trend on premiumisation. Our Ultra brand, driven by localisation of our suppliers in the brewery and the relaunch of the brand behind new packaging, also grew 44%. Our premium growth, which we always talk about, is accelerating. Since we have now made premium portfolio more margin accretive behind all the choices we made, it is also showing up in the margins. The second thing which also gives me a lot of confidence, the discipline on revenue management, because it is not about pricing only.
Vivek Gupta: It is about state mix, brand mix, our own brewery mix versus the contract brewers, the mix on which states we want to play, how much state invest we do. The bold choices has led to a very strong pricing mix in this quarter. The cost discipline on A continues to invest where we want to invest. At the same time, looking hard at our waste or the things which we can take that out of the system. Overall, strong cash flow, strong inventory management, very strong growth rate, premiumisation, all of this gives us an indication we are absolutely on the right track. It gives us the indication there is a lot of potential to be had. It also gives us more confidence that our strategy is working and we are going to invest more.
Vivek Gupta: Going into the next quarter, which is in October, November, December, we are going to double down our investment, both commercially but also being ready for the next year. Please understand the supply chain in India is not fully geared up for disproportionate growth on year-on-year. For us as a large player, we need to make sure we make us ready for the next season. As we get into the next summer, we will be cycling our strong growth rates, and those investments need to happen now. We are going to make investments in this quarter. One of the things that Jorn said, I would not look at this quarter by quarter results and say, "Okay, let us keep delivering this top line, bottom line every quarter." I think it is the health of the business is very strong.
Vivek Gupta: The strategic shape of P&L is very strong, there are enough proof points that our strategy is working, it is only going to create a much bigger category, a much bigger profitable business for UBL in India. With this, Jorn, I will hand over back to you.
Jorn Kersten: Yeah. Thanks, Vivek. There are a few things I would like to clarify, given the results, to give a bit more breakdown of what is underlying, which is both on net sales, on the revenue as well as on the margins. Of course, addressing the question that many of you will have, how much of this do we expect to be structural? Let me start at the top in the net sales, where we delivered 8 percentage points of price mix on net sales. Over 50% is on account of pricing due to both growth pricing as well as rationalization of the trade spends. About 300 basis points is on account of the choices in geographic mix, so the state mix, where, of course, a state like Karnataka has a positive contribution as well as premiumisation.
Jorn Kersten: The final part, around 50 basis points of our Q2 performance is a better leverage of our own breweries. That is a big swing versus previous quarters, I will get to that in a moment. On the growth pricing, we can consider that to be structural. While we see that the trade spend rationalization has a seasonal element to it is also a learning curve for us. We see where we can accelerate, but we also learn in which pockets we have gone too far and have been too bold. We expect that the structural impact of the two combined is somewhere between 200 and 300 basis points.
Jorn Kersten: On the state mix, for this quarter, it is led by Maharashtra and Karnataka, but it is also impacted by limiting our investments in states such as Telangana, where we see that we have muted profitability, hence, the choices that we announced are also resulting effect in the P&L. We continue on this path of being choiceful, we expect that the impact should remain there structurally for 40% to 60% of the contribution on the longer term. To get to the point of CBU mix, I know that triggers a lot of questions, because it has an impact mostly on the revenue line item that we report. Over the last quarters, the operating model mix had a significant negative impact on our net sales, contracting the growth with a range of 400 to 600 basis points.
Jorn Kersten: This quarter, we actually see a reverse impact with approximately 50 basis point gain because we leverage our own breweries more. In general, we expect more reliance on our CBUs, our contract breweries, before and during the season. On the other hand, we see capacity expansion with two new canning lines coming up this quarter as well as the investment that we are doing in Greenfield and these will definitely help to structurally bring more volumes to the market through our own breweries, so hence, having a positive impact on the reported net revenue. Of course, all of this depends heavily on how states develop, but that is to give a bit of background on the breakdown of sales and revenue, and how much of that is structural.
Jorn Kersten: Similarly on margins, currently reporting in the quarter 44.7% gross margin versus a 41% last quarter, which then triggered a lot of questions whether or not we believe that was the low point for margin delivery. Structurally, we expect positive impact from pricing on the margins, and trade rationalization to continue. So where that impacts positively in the net revenue, it will also have a positive impact on the margins. Furthermore, the improvements that we are doing with NBI new bottles will also sustain. So we see better use of return bottles in the quarter. However, we see that NBI this quarter is exceptionally low, also because after the season, there are more bottles coming back. So good for the P&L, but always a bit of seasonal impact post the summer season. On the state mix, it is very healthy, where we gain share in profitable states.
Jorn Kersten: Karnataka growing more than 50% in the quarter. Part of this we expect to be structural, because this is also part of the choices that we make. On the other hand, we see that the impact from the Middle East on the input cost is expected to remain, and we see significant input pricing as well on some of the commodities that we source in India, actually. Additionally, we still aim to get pricing in states where we have not taken pricing yet, and where growth margins have actually significantly reduced this year because of the rising input cost. So it continues to be the same journey to make sure that we navigate the pressure on cost through taking the right choices and going after the right moves in the market.
Jorn Kersten: All in all, there is a lot of moving parts, but we expect margins to remain along the range of 43% to 45%, which I think is a good number for everyone to keep in mind.
Vivek Gupta: Yeah. Thanks, Jorn. Just to close before we ask questions, I think there is one question which had come on brand power, because this is most critical for us because stronger brand means stronger category and stronger future. Again, we got the brand power data last week for the quarter, July, August, September, and I am very happy to say that Kingfisher brand has again gained scores on the brand power. Ultra has gained score on the brand power, and Heineken has also gained brand power in the geographies it competes in. So overall, the brands are getting stronger despite a significant momentum on the category, which gives us even more confidence to continue to invest behind this commercially. So with this, we hand over back to the moderator for the questions.
Jorn Kersten: Yeah.
Operator: Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then one on their touchtone phone. If you wish to remove yourself.
Vivek Gupta: Hello, Nicole.
Operator: Yes. Can you hear us, sir? Ladies and gentlemen, we will now begin with the question and answer session. If you wish to ask a question, you may press star and then one on your touchtone phone. If you wish to remove yourself from the question queue, you may press star and then two.
Vivek Gupta: Hello.
Operator: Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions assemble.
Vivek Gupta: Sorry, are you still there?
Operator: Ladies and gentlemen, we have the issue with the management line. Please stay connected while we reconnect the line for the management. Thank you. Ladies and gentlemen, we have the management line reconnected back. We will move on to our question and answer session. We will take our first question from the line of Abneesh Roy with Nuvama. Please go ahead.
Abneesh Roy: Yeah, thanks, and congrats on a very strong set of numbers. You had highlighted a lot of insights in the Capital Markets Day, so thanks for that. My first specific question is on Karnataka and Jharkhand. 50% plus growth for obviously industry will not go at 50%, so my specific question is
Operator: Sorry to interrupt. Abneesh, your line is getting chipped in between.
Abneesh Roy: Yeah, is it better now?
Operator: Yes, sir.
Abneesh Roy: Sorry for that. My specific question is in Karnataka and Jharkhand, if you can tell us what is the market growth rate for the alcobev industry and what will be the local players in the beer segment, what will be their growth rate? Then we can get some sense of the share gain, either within the alcobev or from local players in beer in Karnataka and Jharkhand, given the 50% kind of growth rate in these two markets.
Vivek Gupta: In Karnataka for this quarter, we have grown more than 60% on volumes as UBL. We think that the category growth is in the range of 50% plus. Most of the category growth is contributed by UBL. We have actually gained almost 250 bps of market share in Karnataka. You can do your math. The interventions which we did behind the right pricing on our brands and really driving the innovation portfolio has really led to that growth. Coming to Jharkhand, we are still seeing the annualization impact of the privatization of the retail policy. Jharkhand growth is more in the range of 20% for us. Actually, more than around 40% for us because in Jharkhand, we are still not producing a premium portfolio locally.
Vivek Gupta: We actually work through our CDU and doing it, but that is going to change in the near future because we are working on more localization of our brand. I would say that, in both the cases, and with the data we showed that everywhere where there is a disproportionate growth happening in the category, UBL is able to capture market share and drive premiumization in both the markets. These are two good examples.
Abneesh Roy: Sure. You mentioned choices that we make multiple times, including the CFO's comment also. Any specific example you can give for Karnataka market? Because two things are happening there. One, of course, 60% volume growth, and CNJs and the price mix growth of, say, 4% or, say, overall 8% also. Big part seems to be coming from Karnataka. Any specific example you can give on choices that we make? What do you mean by that?
Vivek Gupta: First of all, I do not think that choices is only about Karnataka. Karnataka, if you actually look at the volume for the thing, Karnataka is actually less than 15%. It is actually 11% to 12% of our business. You would appreciate, Abneesh, that Karnataka cannot swing the price mix only because they are in Karnataka. It is the series of revenue management program which the company is running, which is by state, by SKU, by mix, where to spend money in which SKUs, where to spend money on which brand, because we are a multi-brand portfolio. At the same time, the trade spend, because there is a large amount of money which goes to the trade. I think making those sharper choices across the country and driving the key business drivers and making money work harder has been a big part of the program.
Vivek Gupta: So, even if I take Jharkhand, Karnataka, all put together, they are less than 20% of our business in those two states. It is all India wide, big one, but we also make some real calls. For example, economy portfolio in, let's call it in Telangana. We see there are some companies who try to do a lot of trade spend in Telangana when there is no margin in Telangana. We are not going to do that. We are okay to lose share in Telangana if it is a question of buying shares to show very good numbers. Those behaviors we are not doing. In the market where there is no MRP regime, like Haryana, for example, where retailers sell the product at whatever price they want. Why would we like to fund their margin just because the consumer is going to charge more?
Vivek Gupta: Also the choices of just importing brands in the state, even if it is non-profitable. We are making those hard calls where we are not chasing a number, but we are chasing a better quality of business.
Abneesh Roy: Understood. Last question. Vivek, since you have joined, a lot of initiatives on the premium has been done. The company has regained some level of market share also in the premium, but still, I think you are the number 3 player in the premium. Now, when I compare on the other IPO on the beer sector, Carlsberg, a lot of questions are coming. Their margins are far superior. I understand their revenues are a fraction of yours. They also don't operate in all the states. But when, as a VC in the same state, for example, when we compare your revenue, your margins versus Carlsberg, could you give us some sense? Because headline numbers do not give the full details.
Vivek Gupta: Yeah. See, look, I don't want to compare apples to oranges. You are comparing a business which is national, which is having a big mainstream brand like Kingfisher, where we are having a full portfolio with one-third the size of the business, which is not even national. I don't want to compare apple to oranges to really do that, to be very honest with you, with all due respect. I think it is a great company, and we all respect our competitors, and we do that. The opportunity of beer is not about doing shares from Carlsberg or AB InBev or other players. Opportunity of beer is to really expand the category. And is there profit pool in this? Yes, if we make the right choices, playing in the right state behind the policies to really bring together. The other thing which gives me confidence is the brand power data.
Vivek Gupta: When I say that we are growing brand power, which is actually measured by Kantar on a consistent basis, the brands which show higher revenue have lower brand power or declining brand power, it gives us a lot of future. The other thing is, we are coming from behind in premiumization, and one of the reasons is our local footprint, which we talked, and the growth rate of 67%, 47%, or 38% gives us a lot of confidence that consumers are accepting our brand. I do think the glide path we had given on revenue and margin during the Capital Markets Day, we are working on that, to consistently drive category growth, our revenue growth, right mix, and sequentially improve our bottom line margin. I think that's where I'll be.
Abneesh Roy: Sure. Thank you. That's all from my side. Thank you.
Operator: Thank you. Your next question comes from the line of Latika Chopra with JPMorgan. Please go ahead.
Latika Chopra: Hi. Thank you for the opportunity. Few questions from my side. The first one was related to your comments on sharper geographic choices, and you shared some examples on how much Karnataka and Jharkhand are now less than 20% of the business. Would it be possible for you to share some color on what are the top five, six states for you, and what is the revenue salience now? The second-
Jorn Kersten: Sorry, Latika. What was the second part of the question?
Latika Chopra: Yeah. No, let's take this question first, and then let me ask you the second one.
Vivek Gupta: See, for us, Telangana is the biggest volume state for us. It is for the category, and we have a very strong presence. We also have very strong presence in Karnataka, Andhra, Rajasthan, UP, because see, we are there everywhere where the category is. For us, I think it is. What we are also seeing is that our dependence on few states is reducing. We have huge opportunity in states like Tamil Nadu, for example, where market is opened up. We are right now 30%, 35% share. We should be 55%, 60% share like in other parts of the country. States like West Bengal, where we do not have canning line, which we will have in the future, and we are operating less than 30% shares.
Vivek Gupta: I think, there is a combination of large states where we are already market leader, and there is a large state where we have a lot of opportunity. For us, I think we are broad-based, but our revenue is now getting more fragmented because states like Jharkhand are smaller states but are contributing to the growth. There are states like Uttarakhand or states like Odisha, which are contributing to a heavy growth, above 16%. I think what we are seeing is winning in all stores, but more states are becoming more relevant. But we have to make choices like in Telangana. While it is a large state, but we just cannot invest more on trade spends and everything if we are not going to get pricing or not making money. I think that is what we meant by, Latika, making more hard choices.
Jorn Kersten: And maybe to add one thing in line with the Capital Markets Day where we spoke about the three different buckets in which we look at the markets. We see that the choices also have an impact on the salience of volume contribution across these buckets. While this is a sequential movement, and it does not change the world overnight, we see that that is moving favorable towards the bucket of the more profitable markets, and the salience of the other markets which are less profitable is coming down. That is a sequential movement which we continue to track, but it also has an impact on the shares. But if we exclude share development, if we exclude the non-profitable market, it is actually a very different picture, and it shows that we are making the right choices for us.
Latika Chopra: Sir, this is encouraging. My second question was around margins, and one part of the margins was pricing. You talked about half of this nearly 8% pricing growth that you saw was on account of pricing plus rationalization of trade spends. So effectively, does it mean you had about 2%, 3% of your pricing growth in the quarter? I wanted to connect it with the comment that you made that you saw pricing actions in 24 markets. Could you elaborate? At the same time, you also said you are going to seek more. So which are some of the larger markets where you still are waiting for price hikes to come through?
Vivek Gupta: See, Telangana.
Latika Chopra: And what does it imply for this pure pricing growth in the equation?
Vivek Gupta: See, almost 30% of our business, we have not taken any pricing yet, and these are big markets like Telangana, Andhra, and Tamil Nadu, to give a few examples. They are almost 30% of our business, where we are still working with the government to take the pricing because input costs have significantly gone up. I think that is important to know because we have been working across states, and when we say pricing, it is a combination of state spend reduction, list pricing these, but it is also a combination of the SKU mix. You know the bottles have a very different mix than cans, and a big bottle has a different margin than a smaller bottle. So all of that revenue management work is being done.
Jorn Kersten: Yeah. I think your math is about right, Latika, on the impact of pricing and how much pricing we take. I think the encouraging part for us is that we see the ability to price. I think that is where we take a big learning on how we should continuously do that. Moving forward and moving towards the future, to Vivek's point, it is not only about pure pricing, but it is also how can we use price as well as other levers to drive this mix across packages, across brands, to make sure that we go into an era of more profitable growth.
Latika Chopra: Sure. The last bit was on brand spends and brand investments. Any color you can share with us? Because you talked about setting it up in a meaningful way, so how is FY27 or H1 of FY27 shaping up on these spends versus the last year? Any color, any favor? Thank you.
Jorn Kersten: I think we have started this already the last quarter of last year in terms of recognizing that there is an increased intensity on competition across the market, with a lot of the players looking at India as a main source for volume growth. So we see that in the year to date, our commercial spend behind our brands is up by around 20 percentage points versus previous years. Which means that it is growing ahead of our revenue and ahead of our volume, which is exactly also what we aim to do, and that is why we continuously stress, in the narrative as well, that investing behind the brands is the long return.
Jorn Kersten: You will recall that we announced earlier this year that we want to move from push to pull. This is the big driver to create that pull from the market to make sure that we excite the consumers on the brands. As Vivek also announced, going into the next quarter, which is the first part of the preparation for next year's summer, we continue to invest because we see the positive impact from a similar exercise that we did last year at a smaller scale. Staying on air with the brands, investing behind the brands year-round, has a positive long-term impact on the brand power, which we think is the biggest driver to create that pull with consumers and move away from the push, which allows us to also pull out of the trade spends where we can and reinvest that money behind the brands.
Latika Chopra: Sure. Thank you so much, gentlemen. Wish you the best.
Jorn Kersten: Thank you.
Vivek Gupta: Thank you.
Operator: Thank you. Our next question comes from the line of Harit Kapoor with Investec. Please go ahead.
Harit Kapoor: Yeah. Hi, good afternoon to you. Just two questions from my end. The first one was on the two markets that you have mentioned in the last few minutes, which is Tamil Nadu and Telangana. If you could just give us a broad update on how the changing environment in Tamil Nadu has started to play out for you guys, as well as for the industry. Any delta change that you are seeing over the last few months, in terms of how operationally the business is being run there. You mentioned, given that your share is lower, and I think we understand why, because regional presence is very high. Just wanted some sense on Tamil Nadu. Second was, on Telangana, there have been news articles, over the last few months here and there about discussions on price increases.
Harit Kapoor: Just wanted to know your level of engagement there and how things are panning out. Is the fact that you are reducing spend there a function of your view that pricing may not be on the anvil in the near term? Just your comment on these two states is my first question.
Vivek Gupta: Yeah. Thanks, Harit. I will comment on Telangana first. I think we are working very closely with the Telangana government and through Brewers Association of India. Telangana did ask for a pricing committee, and we did make a submission sometime in August on our cost submission, which is a first process for the government to review the pricing. We are hoping that that committee which they formed, which was led by judges and all, will come to a logical conclusion. So we are very hopeful that in the coming months, the committee will take an action because data was very clear. At the same time, till that pricing happens, it is very difficult to make more investments and also make investments which do not really drive the category expansion.
Vivek Gupta: And just to give you a sense, we had a flat business, and we lost a bit of shares in Telangana because there were competitors who were still spending money to do that, which is fine because our brand power is very strong. In Tamil Nadu, I think they are doing a lot of changes, but they are doing in the parts. Some of the early changes are definitely helpful because the ordering system has become more transparent. We have two breweries in Tamil Nadu. We have all the ground presence, and we are making some capital investment to scale up those breweries, including looking at new capacities and new forms. Recently, you would have read in the press, we also got approval to launch Heineken Silver in Tamil Nadu, which I think will be a massive launch.
Vivek Gupta: I think a combination of this, we are very optimistic on where it is, but the whole policy is still coming up in the part. I will be able to give you a full picture once we do that. But we know the state has massive potential, and we being there locally present with our breweries have the right to expand very quickly in Tamil Nadu.
Harit Kapoor: That is great to hear, Vivek. The second question was on the pull-push strategy that I think Jorn also spoke about. Do we see that the financial impact of lesser promotions at a national level and more pull, which is the brand investments, is that you see margins staying similar because promotion goes into brand investments, but it improves your brand power and most likely then drives revenue growth in the medium term. Is that the outcome that you are looking to achieve when we talk about this?
Jorn Kersten: Well, there is a couple of elements, Harit. One, it is long-term. It is creating much more value because we create long-term closeness to consumers, and it helps to build the category. Building stronger brands builds the category. So long-term, it is the right thing to do, and even in a dark market like India, where we can, we invest behind the brands. On the short-term, we see indeed that we reinvest that cutting back on trade terms. We reinvest it behind the brands, which means that it moves from our top line to our cost base. So it has an impact on gross margin expansion, but not so much on the short term on our EBITDA margin or our operating profit margin.
Jorn Kersten: Now, we do feel that the accelerator and the catalyst of investing behind the brands through increasing brand power is more sustainable than trade terms. I think that's the second important long-term effect of moving from push to pull, is that if you continuously invest behind the brands and behind your brand power, you create sustained demand for the brands, where trade terms will always have a large component of short-term pushing volumes. So those two elements mean that longer term it is definitely contributing to the P&L. Shorter term, it's more of a shift between lines.
Harit Kapoor: Got it. Thank you. Wish you all the best.
Jorn Kersten: Thanks, Harit.
Operator: Thank you. The next question comes from the line of Ashutosh Jain with Barclays. Please go ahead.
Ashutosh Jain: Hello. Thank you for taking my question. Two for me, please. The first one would be, how should we think about the volume growth in the upcoming quarters? I am just thinking aloud, you have a relatively favorable comparison base. It is very low. Karnataka AIP benefits, Jharkhand retail liberalization, and other premium portfolio expansion in the state. These are the tailwinds in the upcoming quarters. Should these tailwinds support continued double-digit growth rate ALCO, or there are some offsets which we should be mindful of?
Vivek Gupta: I think the critical driver of category growth is the policy changes, and the policy has a life, right? The cycling of Karnataka when coming next May, June, it will be the same base, right? I think other than the macros, I think continuously work on the states to make beer more affordable and more fair on taxation will be the priority to really do that. Having said that, the macros for the categories are very strong with the 25 million youth coming to legal drinking age, with the expansion of the beer portfolio and the more focus on experience. I think we definitely think the premiumization as well as the macros, but more fueled by the policy changes.
Vivek Gupta: The category has the potential to continue this momentum, but our outlook is still 6% to 7% volume growth if the policy movement does not happen dramatically like what has happened in this year.
Ashutosh Jain: Okay, fair enough. Thank you. My next question is more of a strategic one. Do you have any plans to participate in the RTD category, and how do you assess the opportunity for alcoholic RTDs in India? Given United Spirits is now launching Smirnoff Ice, which is a malt-based alcoholic beverage. Do you see this as an incremental to a beer category? We have previous examples where with the RTDs, they primarily tend to take share from the beer category. Do you think it could potentially cannibalize the beer consumption occasions in India, particularly at the premium end?
Vivek Gupta: We believe the opportunity on beer is so huge both in terms of penetration. Out of the 10 occasions where consumers drink alcobev, beer is in 1.8 occasions.
Vivek Gupta: So we see a huge opportunity in beer itself. I do not want to comment on what else we want to do, but I see a huge momentum on beer itself.
Ashutosh Jain: Okay. Fair enough. Thank you.
Operator: Thank you. Our next question comes from the line of Nitin with HDFC Securities. Please go ahead.
[Analyst] (HDFC Securities): Hi. Thanks for taking my question. My first question pertains to your operating model mix. Would you be able to highlight what is the current percentage of production coming from own brewery, contract brewery, and tied breweries?
Vivek Gupta: Our own breweries are almost 70% to 75% of our production, depending on the season and the mix which Jorn has projected. But 70% to 75%, depending on the month, quarter, season, production, and rainfall, all of that factors into that.
[Analyst] (HDFC Securities): Yeah. Would you be able to highlight what is the mix we have from tie-up units, which eventually will come to either the own production or contract brewery?
Jorn Kersten: Sorry, can you repeat that question? We missed the first part.
[Analyst] (HDFC Securities): No, I am asking in terms of this, like the tie-up units, where we see the tactical opportunity or our own production on breweries are going through the CapEx cycle. So what is the quantum of tie-up units which eventually will come to our P&L in terms of our overall volume?
Jorn Kersten: I think that is not a number that is carved in stone. I think given the fact that the growth in India we expect will be minimum at this number where we are today, we continuously look at what is our footprint, and we cherish the agility of having a mixed operating model. So it is a conversation that every now and then we have with some of our contract brewers, what is the future of this tie-up and whether or not it should evolve into something which involves ownership.
Jorn Kersten: I can tell you that is currently not anything which is happening as we speak, but how this footprint will evolve is something that we track on a continuous basis to make sure that we are set up the right way and that we are also able to anticipate growth on a state-by-state level, making sure that in places where the growth accelerates, that we are sufficient in terms of capacity. I think that is the first thing that we make sure that we are present with production in the state, whether that is through investing in our own breweries, whether it is through a greenfield like in UP, or whether it is through new tie-ups. I think since Vivek onboarded, I think we onboarded 8 additional CBUs to really make sure that we are present through our operating model mix there where the volume is also accelerating.
Jorn Kersten: Once that partnership continues, we can discuss how it evolves. But it is not something which is a standard view that we have on the contract model.
[Analyst] (HDFC Securities): Sure. Thanks a lot. Second question pertains to Heineken. Would you be able to help me, two things. One is that how many of our breweries have this horizontal brewing capacity, and second, what is the reused bottle percentage for the premium portfolio? Thank you.
Vivek Gupta: Yeah. Heineken, we produce in four breweries locally with us, and we plan to expand with the UP expansion, which is coming in locally in UP, and we are looking at one more very soon. For return bottle, that percentage is improving because a lot of it is to do with the localization, which also is having a good impact on the gross margins on premium portfolio. We will not be able to give you specific brand-wise numbers, but we are seeing a significant improvement in the portfolio. On Heineken, we are having one-way bottles. We do not recycle the Heineken bottles yet.
[Analyst] (HDFC Securities): Yeah. Sure. Thanks a lot. Thank you.
Operator: Thank you. A reminder to all the participants, if you wish to ask a question, you may press star and one now. Your next question comes from the line of Karan Kamdar with Choice Institutional Equities. Please go ahead.
Karan Kamdar: Yeah. Thank you for the opportunity. What I wanted to know is how are you faring in terms of volume growth, how much of it is sustainable, and how much of it is purely price-led and we may see increased competition just take that volume growth away from us?
Jorn Kersten: Well, I think, to be very fair, a lot of the volume growth is price-led one way or another, and we see affordability in India as a big driver of the category, and that's why we are always advocating for equitable taxation versus spirits. We see that wherever that happens, there is a hike in demand from consumers. So fair pricing versus spirits is one of the number one outcomes of policy and regulatory improvements that we see that is driving the category. From that point of view, we can argue that pricing is a big driver. We see that the current pricing that we have across 24 markets, I will not say that there is very limited elasticity, but we see that with that pricing, we still remain, as an average, the MRP remains below inflation.
Jorn Kersten: So the affordability of beer, despite the pricing that we take, still remains improving, which is a big driver of the category growth and which is also something that we actively go after where we offer premiumization to our consumers. But for the rest of the portfolio, we also make sure that affordability is there.
Karan Kamdar: Got it. Second question is on increased competition. Given that a lot of brands are moving towards an IPO, do we see any threats from there, and what is our strategy to manage premium segment, given that competition will increase specifically in the premium segment rather than the lower tier where we have dominance?
Jorn Kersten: Yeah. We welcome competition, first of all. We think it is very good for the category. We see that competition intensifies across different segments. It depends on the state, it depends on the availability of capacity in the state. We see different movements. Our focus is on our own portfolio and on the strategy behind our brands. We believe that, and we know that we have the biggest portfolio in the capital market today. I also commented on the fact that we are the only player in the country that is able to onboard consumers at an affordable price point, and then stay with them through their journey of premiumization with local premium in the Ultra portfolio, and then moving on to international premium like Heineken.
Jorn Kersten: We believe very strongly that we have the right portfolio to win, whether the competition intensifies in the premium segment, in the mainstream segment, or in the economy segment. Overall, again, we believe that it is very good for the category as a whole, and we believe that we are set to win across India, and where we have an advantage already, being a national player with the network availability that we have across all states.
Karan Kamdar: Okay. Thank you. All the best.
Operator: Thank you. Our next question comes from the line of Jay Doshi with Kotak. Please go ahead.
Jay Doshi: Hi, team. Thanks for the opportunity. I have got a couple of questions. The first one is for Vivek. You mentioned about a committee being set up by Telangana to review pricing. Is this something very different and new versus how it used to work earlier? Are you expecting a major course correction in the way pricing sort of works in Telangana or unit economics for the industry? Or will it be just another round of price increase, somewhat like you got one maybe a couple of years ago?
Vivek Gupta: Yeah, I think this process is not new. I think what we are able to do through the association is to bring this committee early, because the last committee which was set up on beer was multi years ago, before we got the pricing to do that. I think we see it as a positive step where government was able to set up the committee when we talked a lot about Middle East pricing, impact of Middle East cost increase because of the Middle East crisis. I think it is a part of their process where they put a committee of judges or led by a judge, and the committee ask for the suppliers to submit their cost part.
Vivek Gupta: Now, outcome of the committee is anyone's guess, whether they will. We expect them to materially change because the data is very compelling, and we really hope that they make the right call, but we do not know till they actually decide.
Jay Doshi: Understood. Very helpful. Second question is on profitability now for Jorn Kersten. Last quarter you had called out INR 4 billion to INR 5 billion of cost inflation over two to three quarters, and it translated into 500 basis points of sales. Now this quarter, your profitability has improved by 200 basis point gross margins versus last year. If you could walk us through the bridge, I know you did partly answer this question in the opening remarks. If you could walk us through the bridge in terms of the actual cost inflation that you witnessed during this September quarter, how much of that was offset by, let us say, efficiencies on better recovery of bottles? How much of that was offset by better state mix, and how much of that was offset by trade rationalization?
Jay Doshi: Then, I know you did comment that gross margin will be in 43% to 45% range.
Jay Doshi: Should we assume that for the coming two quarters, then should we expect next year to be better as cost inflation or cost pressure ease?
Jorn Kersten: Yeah. Thanks for that question. Let me start with the end. With all of you, we sincerely hope that the cost pressure will ease. To the rest of your question, we did call out indeed that impact that we expected on the full year, where we have seen that through some of the mitigation efforts, we see that the gross impact is coming down slightly versus the initial indication that we gave, which was I think in May. We now expect for the full year 2027 to be the gross impact to be in the range of INR 350 to INR 400 crores, so slightly lower than we initially thought.
Jorn Kersten: Secondly, we believe that the mitigation plan is also moving along very well and structurally improving, which means that overall, we expect that the impact is within that range of 43% to 45% for the next couple of quarters, because we do see that increased cost pressure remaining, also in the next quarter and the quarter after. We don't expect that to ease very quickly. I think the one thing I would like to highlight is that the changes that we have made are structurally improving the business. What we've refrained from is knee-jerk responses as, for instance, moving away from investing behind the brands or investing in the brews. We're really mitigating this to sustain structural productivity, sustain pricing, taking the right choices on state mix to really structurally long-term improve the business.
Jorn Kersten: Of course, it helps to offset the impact of short-term cost pressure, and it will help to accelerate margins when cost pressure eases off. When also means if in this case, because if I'm honest, my expectation is that even if we will hopefully find an end to this war, we won't go back to pre-war pricing if we see that.
Jorn Kersten: Infrastructure in the Middle East has also been heavily impacted. I do not think that will happen. It does mean that structurally, the health and the quality of our business is improving, which I think is a good thing, and long term, will definitely have a positive impact on margin development.
Jay Doshi: Sure. Thank you so much. One last question from Vivek, if I may.
Vivek Gupta: Yeah, sure. Go ahead.
Jay Doshi: It appears that your decision to lower the prices for KF Ultra in Karnataka may have significantly helped drive premiumization and volume growth in that market. Do you think that there is possibility to revisit the pricing for some of your premium brands in other states as well based on the success you are seeing in Karnataka? Or is it largely successful in Karnataka because of the policy change? Without policy change by any peaks in pricing, you may not see the same level of success. That is one. Second is, now that you have launched Heineken Silver in quite a few states, where do you think, what is the potential for Heineken Silver in terms of, as per your best guesstimate, what market share it can have in India in the next three years or four years?
Jay Doshi: Or, what could be its contribution to your overall sales based on the traction that you are seeing for that brand?
Vivek Gupta: Yeah. No, I would start with the end in mind. I do not know, 3 years, 5 years, 10 years, 15 years, but I think we are very confident Heineken would be the biggest premium brand in India beer market. This is a brand which is underserved in India. This is a brand which is the most valuable brand globally. With the Heineken Silver now, the growth rate which is happening in Vietnam, China, Brazil, some of the other countries, we are very confident on the recipe of success. You will see that we are investing behind the manufacturing capacity, getting the right distribution, getting the right execution. So I see the future is very bright, and the 67% growth of Heineken Silver, in my view, is not aberration. This will continue on Heineken Silver.
Vivek Gupta: I think for us to do any pricing action, policy intervention is must because the gross margins are so low in this business, and you need to invest in brand building awareness. The taxation is a key one. We were able to do it in Karnataka because there was a positive step from the government of reducing taxation on low alcohol beer. We wanted to make sure that consumers can get the best choice of beer. So I think taking price reduction without a policy change is not wise. Having said that, selectively where we are off pricing strategy, we will continue to do the right thing, but that irrespective we should do anyway due to run a good business.
Jay Doshi: Thank you. That is it from my side, and great execution. Thank you.
Vivek Gupta: Thank you.
Operator: Thank you. Ladies and gentlemen, as there are no further questions, I now hand the conference back to the management for closing comments.
Vivek Gupta: Good. Thanks everyone for engaging with us for the past 60 minutes, and for all your questions. Again, we are very confident that we are on the right track. Very proud of the results that we and the entire team delivered in Q2, and confident that moving into the next quarter, we continue to remain on track with the strategy and go with excellent execution to continue on this path. We will talk again in the next quarter, and have a great day, everyone. Thank you for joining.
Operator: Thank you. Ladies and gentlemen, on behalf of United Breweries Limited, that concludes this conference. Thank you everyone for joining us, and you may now disconnect your line.
