United Breweries Co Inc Q3 FY2023 Earnings Call

Good day, everyone and welcome to CCU's Third Quarter 2023 Earnings Conference Call on the 9th of November. Today's conference call is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, the Head of Investor Relations. Please go ahead sir.

Welcome, everyone, and thank you for attending CCU's third quarter 2023 conference call. Today with me is Mr. Felipe Dubernet, Chief Financial Officer. You have received a copy of the company's consolidated third quarter 2023 results. Felipe will now review our overall performance and we will then move on to a Q&A session. Before we begin as usual, please take note of our cautionary statement. The statements made in this call that relate to CCU's future performance or financial results are forward-looking statements, which involve known and unknown risks and uncertainties that could cause the performance or results to materially differ. These statements should be taken in conjunction with the additional information about risks and uncertainties set forth in CCU's annual report in our 20-F form filed with the US Securities and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce Mr. Felipe Dubernet.

Thank you, Claudio, and thank you all for joining us today. During the third quarter 2023, CCU continued making progress to recover financial results and profitability in a challenging and volatile economic environment. The latter is strong at the operational level, increasing consolidated EBITDA by 27.7% and improving 269 basis points EBITDA margin. The performance of the quarter shows that the path to improve our profitability under the regional plan HerCCUles is moving forward. However, stronger efforts are needed in the context of economic deacceleration and volatility in exchange rates and commodity prices. This drives us to focus on the pillars of HerCCUles. First, maintain business scale, strengthening revenue management efforts, deliver efficiency gains through our transformation program, optimizing CapEx and working capital, focusing on core brands and high-volume margin innovations and continue investing in our brand equity. In quarter three 2023, our revenues expanded 0.4% explained by a 5.1% increase in volumes more than offset by a 5.7% expansion in average prices in Chilean pesos. Lower volumes were caused by weaker consumption in Chile and Argentina and worse weather especially in Chile, while holding market share with a contraction in wine exports. The higher average prices in Chilean pesos were a consequence of revenue management efforts across all our operating segments. Gross profit jumped 8.9% and gross margin rose 362 basis points, the latter explained by the higher average prices and flat average cost of goods sold versus last year. The MSD&A expenses increased 2.9% and as a percentage of net sales grew 94 basis points mainly as a consequence of higher marketing activities, the latter to keep enhancing brand equity. In all, EBITDA reached CLP86,344 million, up by 27.7%. Net income dropped 44.9% totaling a gain of CLP9,499 million due to technical difficulties during the quarter. Additionally, there were CLP8,665 million of nonrecurring expenses related with the integration of the route to market of our JV in Argentina with our Danone into our beer and cider operation. In terms of cash generation, we delivered another robust quarter. Thus, as of September 2023, net cash inflow from operating activities totaled CLP205,681 million versus a negative cash inflow of CLP21,871 million in 2022, while net cash outflow from investment activities reached CLP111,051 million, decreasing from the CLP175,168 million during the same period in 2022. In addition, we have decreased our portfolio complexity and recorded strong brand equity in our operating segments being key to hold market share in our main categories. In the Chile Operating segment, our top line expanded 5.1% explained by a 4.7% decrease in volumes being more than offset by a 10.2% growth in average prices. The higher average prices were explained by robust revenue management initiatives that we have taken from the end of last year. Lower volumes were explained by a challenging consumption environment along with unfavorable weather, although in line with the industry as market share remains stable. Gross profit expanded 17.4% due to top-line performance and lower cost pressures. MSD&A expenses were 12.3% higher and as a percentage of net sales grew 237 basis points mostly due to higher marketing activities. In all, EBITDA reached CLP52,618 million, growing 38.7%, and EBITDA margin increased 320 basis points. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 2.4% contraction in Chilean pesos as a result of a 4.3% drop in volumes, partially offset by a 2% increase in average prices in Chilean pesos. Volumes were negatively impacted by a weaker consumption environment in Argentina, partially compensated by volume expansion in all the other geographies. Gross profit expanded 1.1%. MSD&A expenses decreased 6% and as a percentage of net sales improved 167 basis points due to efficiencies compensating high inflation and other cost pressures, especially in Argentina. Altogether, EBITDA reached CLP25,785 million, a 30.2% expansion from last year. The Wine Operating segment continued facing a tough business environment during the quarter. Revenues were down 4.7%, mostly explained by a 17.3% contraction in volumes while average prices increased 3.1% due to revenue management in the domestic market, partially compensated with negative mix effects. The lower volumes were explained by both a 14.4% fall in exports from Chile and a 14.8% drop in the Chile domestic market. Gross profit dropped 8.1%, but gross margin improved 296 basis points due to higher average prices and a decrease in cost per liter, due to a more favorable cost of wine. MSD&A expenses were flat versus last year, and as a percentage of net sales increased 429 basis points associated with the lower business scale. In all, EBITDA reached CLP11,606 million, a 21.2% contraction. In terms of our main JVs and associated businesses in Argentina, volumes of our water business decreased low double digits, mainly impacted by a challenging consumption environment. Also, we successfully continued with the route-to-market integration of this business. Finally, in Colombia, volumes contracted low single digits. Now, I will be glad to answer any questions you may have.

Our first question comes from Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.

Thanks, operator. Good morning, Felipe and team. Thanks for the questions. First let me start with volumes. Clearly, the volumes were not excellent in the quarter. When you look at the third quarter of each year for the past few years you've been coming down from a peak of 8.2, I think in 2021 than 7.9 in 2022, now 7.6. Do you think the post-pandemic correction is done? Should we be thinking about normalized volumes for hereon out? Or do you foresee that there's a little more pain ahead given what's happening with consumption in Chile?

Yes, first of all, comparing volumes nowadays with 2021 and maybe especially 2021 is not the right comparison because you have 55 billion of pension fund withdrawals in Chile and a boom in consumption. So it is worth noting that 2020 was the year of the pandemic lockdowns, and 2021 was the party in consumption in Chile due to the pension fund withdrawal. So I particularly prefer to compare with pre-pandemic volumes. From 2019, total CCU volumes compared to 2019 are 14% lower, and compared to the third quarter against the third quarter of 2019, it is 10%. The first pillar of HerCCUles is to preserve scale, both relative scale and absolute scale. And I think we are on this task. Regarding the third quarter volumes, of course, we came from a volume reduction in quarter one of 3.4%, but we were still comparing against a very high comparison in quarter one of 2022, which still had the effects of the pension fund withdrawal. Then we had an excellent growth in the second quarter, growing 4.8% in volumes and down 5% in quarter three. Coming to Chile, of course, we decreased the volumes in quarter one by 1.2%, because of the big comparison. So it was a very good volume. In quarter two, we grew 4.7% and now we decreased 4.7%. I think there are two factors in that. The first factor has to do with temperatures. We have had a very rainy which is very good for Chile, as a country of course to have a good level of rain, because we have drought conditions. So we had a lot of rain during July, August, and the start of the spring as well as cold temperatures. The decrease in volumes in Chile is partially explained by temperatures. On the other hand, of course, there is a deceleration in terms of consumption and we have been predictive on that because HerCCUles is about maintaining scale. Therefore, if we look at overall results in Chile, we are maintaining more or less scale in absolute terms, as we are a bit practical in our volumes, and our volumes in Chile are 0.7% less than last year, maintaining scale overall. In terms of relative scale that takes into account the market share we are holding even growing in some categories our market share positions. That's the scenery. Going forward, it's difficult to predict. We will continue to face, I think, at least in the next few quarters maybe this acceleration, but I do not foresee further deceleration in volumes. I see that we will be able to maintain the scale. I do not predict something different given that. Quarter-on-quarter, it will depend on weather, as we depend on temperatures. It's impossible to forecast weather. There are some predictions that we might have a very hot summer, but I don't know. Meteorology is a difficult science. But in a nutshell, that is what we see in terms of consumption.

Okay. That's very helpful, Felipe. So you essentially think that you're more or less at a new baseline for the company, right? Maybe if I can do a follow-up for costs, after you've had some good quarters of improvement on costs in recent times. And it seemed that costs didn't provide that much of a tailwind in this quarter. What's your outlook for the next few quarters?

Look, in terms of cost, I think we had some good news, but also some bad news. I think we have bad news regarding the non-alcoholic business, especially the non-alcoholic business given the sugar prices that are at historical levels. And also orange juice. The tailwinds are very problematic for orange juice and sugar. In terms of grains, it's a question of carryover of inventories. As I said in previous communications, last year we benefited from pre-Ukraine prices for barley. That, of course, in the global market barley has been reducing in price. However, we still have benefited a lot from the pre-Ukraine cost level, but because of the opposite season that we have with Europe. But in general, this year we see stable unit costs with a lot of pressure in non-alcoholic beverages given sugar prices and orange juice.

Okay. That's very clear. I’ll get back in the queue for a few more questions if not ask. Thanks a lot, Felipe.

Thank you. And have a wonderful day, Felipe.

Thank you very much. Our next question comes from Thiago Bortoluci from Goldman Sachs. Please go ahead, Thiago.

Yes. Hi. Thanks, Felipe, Claudio for taking the questions and good afternoon everyone. I'd like to follow-up now on SG&A, right? I see your efficiency ratio has marginally deteriorated and it seems most of the pressure was due to marketing. Parallel to this, we see Chilean demand has been volatile. The company keeps pushing prices higher. So putting everything in perspective, I am wondering how much more marketing would you need to invest in order to keep scale amidst this very volatile demand backdrop? This is the first part of the question. And the second part, assuming marketing will likely continue to be an important driver for you to keep volumes, how much more efficiency can the HerCCUles plan extract in other lines eventually to partially offset this and protect your EBITDA margin? That's the question. Thank you very much.

Overall, I would say you are right that the MSD&A increased a little bit in terms of percentage of net sales. I would say we recovered normal levels of marketing expenses this year compared to 2022. 2022 was a very tough year in terms of results. One of the pillars of HerCCUles is about protecting or increasing our brand equity. This is what we are having because without brand equity you cannot have good revenue management pricing and sustaining volumes. We think we are investing for the long-term. So adding up also the manufacturing expenses, we are practically flat in terms of expenses as a percentage of net sales. Overall, accumulated to the year, we will continue to support our brands while searching for efficiencies also taking into account that we have had high levels of inflation at the beginning of the year and now with more control. For us, we are just recovering the level of marketing that we should be at and the indicator of percentage of net sales, although we have been doing very robust price efforts that have been a little bit diluted by mix effects. And in the end, business effects also contributed to the increase in this ratio.

Looks good. Thanks very much, Felipe.

Thank you very much. Our next question comes from Mr. Fernando Olvera, Bank of America.

Hi. Good afternoon, and thanks for taking my question. The first one is related to Chile. Returning back to volumes. Can you comment on what was the performance by channel at beer and soft drinks, if there was a difference? And my second question also in Chile, how are you thinking about your pricing strategy for next year?

Thank you, Fernando for your question. Regarding the split between beer and non-alcoholic, it was very similar. We decreased in Chile the volumes around 5.7% - 4.7%. The decrease in volumes was practically the same in non-alcoholic and beer because we are maintaining market share. Temperature affects both categories non-alcoholic and beer, and the macro is affecting equally both categories. Also, the mix is equally affected in both categories. So overall, that was the explanation. And the second question was about Claudio?

About your pricing strategy for next year.

Yes. We have increased prices again. So we are always working on revenue management initiatives and looking at our promotional rationalization or promotional activities, but we have also increased prices now in October in some categories, especially non-alcoholic, given the prices that will not improve from some commodities, such as sugar and orange juice that are putting a lot of pressure on the P&L. So regarding the next year, we expect at least increased prices in line with inflation.

Great. That's very helpful. Thank you so much, Felipe.

Okay. Thank you very much. Our next question comes from Mr. Martin Zicha from Fundamental Capital. Regarding prices, should we expect CCU to push increases north of inflation? Do you see space for that entering 2024?

Prices will depend on many factors. It will depend on input costs as I said, certainly non-alcoholic we should go beyond inflation given the input costs, especially in sugar that is very high. Also for your reference, sugar prices are double compared to 2019. Oranges are more than double compared to 2019. But it will depend on competition as well as how our brand equity is. But of course, if there are opportunities to go beyond inflation, we will pursue that.

Thank you very much. Our next question comes from Mr. Henrique Brustolin from BTG Pactual. Please go ahead sir.

Hello Felipe and Claudio. Thanks for taking my questions. I have two. One – the first one you mentioned that you reduced portfolio complexity right in your remarks. If you could give a little bit more detail on that in terms of which categories were impacted?

Hello, we lost you.

Sorry, I think we lost you for a second. Do you mind just repeating your question please?

Yes sure. It's the first one is in terms of the portfolio complexity that means that you wrote that it has been reduced. So, just wondering if you could give more details in terms of the categories that it happened how relevant this might have been for volumes? And if it's achieving the intended results you planned with it? And the second one on the beer industry in Chile, and this is more of a long-term one but we saw very strong growth in beer volumes in Chile over the past many years. As you mentioned Felipe, volumes remain well above pre-pandemic. And when we look at per capita consumption, it's now approaching the levels of other markets that were more mature for beer consumption, right? So, I just wanted to hear a little bit more from you in terms of how you see the beer industry performing in Chile in the long run right if growth should sustain the levels of the past or if it might be closer to peak?

Yes. Okay. No, thank you for your question, Henrique. Regarding complexity, yes, the program is about to focus on high volume and high margin SKUs. So, if our SKUs do not provide enough volume or the right margin, we believe we should delete about 5% of the SKUs. I think this typically should not have a significant impact on margins. We should have a lot of discipline, especially with innovations, to evaluate whether the innovation is providing better brand equity, better margins, or higher volumes. If you don't provide strong additional brand equity, additional volume, and better margin, we will not launch it. So, that's what the complexity program is about. Regarding your question about beer, of course, as I mentioned earlier, our levels of consumption are robust, and our focus is on preserving scale. We are seeing strong volume compared to pre-pandemic levels. We think that growth has slowed down, and in the next few quarters, we might see around 0% growth. As I highlighted, quarter three was exceptional because of low temperatures. But we think the consumer is responding well. Overall, we have increased prices more than 13% due to mix effects, but we are maintaining the level of consumption that we had last year and also growing against 2019. If you analyze over four years, 2023, 2022, 2021, and 2020, we are growing in beer and non-alcoholic products by 19.3% compared to 2019. This translates to higher than GDP growth. In times of economic acceleration, our products are still attracting consumer spending.

That’s very clear, Felipe. Thank you.

Thank you very much. We have a question from Mr. Diego Guzman from BTG Pactual Asset Management. Please go ahead, sir.

Hi. Thanks for taking my call. I have two questions. You mentioned that you implemented price increases in October for the non-alcoholic business, which suggests that this sector has a stronger pricing trend. However, you also noted that the cost outlook is somewhat more pressured here. Given these two factors, which business do you believe has a better margin trend in terms of gross margin over the next six months? My second question pertains to the non-operational expense recorded as an operational expense in Argentina, amounting to CLP 8,000 million. Could you provide more insight into the economic implications of this change?

There is someone that has an open mic. Okay. – Thanks for turning that off. So your first question, if I understood was about prices. Yes, as I said, non-alcoholic we have more pressure because we have more commodity price pressure from non-alcoholic commodities such as sugar and especially oranges. Our beer business has better margins than the non-alcoholic. Although beer is more linked to the US dollar. So we expect that at the end both categories will require at least inflation, but the non-alcoholic will require more than inflation price increases to compensate for this cost pressure. Regarding the non-recurring expenses in Argentina, this is related to the integration of the Danone water business into our sales and distribution network. This is a non-recurring effect as you highlighted, approximately CLP 10 million. This impacts our P&L in a non-operating manner because it’s a JV that we do not consolidate. Thus, it impacts our non-operational results. Regarding the payback for that, it is clear that it’s adding to our network between 5 million hectoliters more or less of volume, providing us better scale in Argentina in the future. Especially in such difficult times in Argentina, it is very beneficial to synergize both distribution networks, the one we have for beer and the one for water. This acquisition was made last year, and this year we have successfully integrated both businesses not only in sales and distribution but also in head office and financial services and other overhead functions. So it will provide us a stronger P&L in Argentina.

Okay. Just to be sure, you mentioned that both businesses will try to outrun inflation but which business do you see has a better trend in margin normalization: beer or non-alcoholic?

No big difference this year. I think because we had very high aluminum prices on the one hand that affect the beer business and very high resin prices that affect the non-alcoholic business along with very high mold prices. Therefore, at the end, I think as of today, both businesses are in a similar range of normalization. The point is always an estimate, but given what we have so far with the commodity costs, certainly, the non-alcoholic business has more cost pressure than the beer business.

Okay. Thank you very much. Our next question comes from Mr. Carlos Laboy from HSBC Securities. Please go ahead, sir.

Yes. Hello, everybody. I was hoping you could provide more insights into the situation in Colombia, specifically regarding market share, not just in terms of volume, but also how your brands are performing in the marketplace, and so on.

Yes. In Colombia, we experienced a small decline in market share during the first half of the year. However, we are seeing a recovery, especially over the last few months, with a notable improvement in September. We are also regaining our margins, despite facing significant input cost challenges in 2022. We're making progress, but there is still work needed to strengthen our brand equity in Colombia. Nevertheless, the recent results, particularly in September, indicate encouraging signs for market share.

We have a follow-up question from Mr. Felipe Ucros from Scotiabank. Please go ahead.

Thanks operator. Yes, Felipe, if I could do just one more. Just wondering if you could comment a little bit on what's going on in Wine and what you expect going forward? Obviously, there's been a lot of pain and it's not just pain for CCU, it's industry pain with destocking and wholesale channels around the world. But just wondering if you could give us your take on how you think the next few quarters will evolve for Wine. Thank you.

Yes. It's industry pain as you highlighted due to destocking. I will not repeat myself from previous dialogues, but I would be a little more optimistic now because the export performance is improving. In the first half of the year, our export volumes from Chile decreased 19%, which was better than the industry but still significant. In the third quarter, the reduction was 14%, which is better. The positive news is that in October, we have had our first month of the year in which we have increased our export volumes by mid-single digits. So, going forward, I expect recovery in terms of volumes as the destocking should stop. Moreover, we are working on favoring brand preference and enhancing our relationships with distributors. Our commercial offices in the US, China, and the UK should enhance our effectiveness in those markets. It may be too early to call, but we have had good news in October regarding exports, and we expect improvements in the coming quarters.

Okay. Thank you.

Okay. Thank you. We'll just give another couple of seconds for any additional questions to come in. Okay. It looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.

Thank you. Thank you all for attending today. During quarter three 2023, we continued making progress to recover our financial results and profitability in a challenging and volatile economic context. Our initiatives under HerCCUles are showing positive outcomes throughout the year, allowing us to recover our operational results, hold business scale and market share, improve margins, and strengthen, especially our cash generation. Nonetheless, we are aware that more efforts are needed to improve profitability further, especially when the business scenario will remain challenging. In order to do so, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you a wonderful day.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and have a good day. Goodbye.