United Breweries Co Inc Q1 FY2024 Earnings Call

Good day, everyone, and welcome to CCU's First Quarter 2024 Earnings Conference Call. Please note that today's call is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, Head of Investor Relations. Please go ahead, sir.

Welcome, everyone, and thank you for attending CCU First Quarter 2024 Conference Call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; Mrs. Carolina Burgos, Senior Investor Relations Analyst; and Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated first quarter 2024 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. As usual, before we begin, please take note of our cautionary statements. 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 actual performance or results to materially differ. These statements should be taken in conjunction with additional information about risks and uncertainties set forth in CCU's annual report in Form 20-F filed with the U.S. Securities and Exchange Commission and in general report submitted to the CMF and is available on our website. It's now my pleasure to introduce our CFO, Mr. Felipe Dubernet.

Thank you, Claudio, and thank you all for joining us today. Before moving into the performance of the quarter, I would like to mention that quarter 1 2024 results indicate that the business environment in the region will continue to be challenging and volatile. In addition to the devaluation of the currency in Argentina, we faced a low twenties beer industry contraction in that country. In Chile, the Chilean peso devalued 16.6% versus last year, negatively impacting our cost base. In this context, we continue with our 6-pillar regional plan, HerCCUles, taking further actions in terms of revenue management efforts and cost and expenses control initiatives to continue the recovery path of our financial results and profitability. These efforts will be reflected in the following quarters during the year, helping us to gradually compensate for cost pressures. It is worth noticing that the Wine Operating segment posted a turning point in volumes, especially in exports and financial results. During quarter 1 2024, our revenues expanded 1.9% in Chilean pesos, driven by 6.6% higher average prices in Chilean pesos while volumes dropped 4.4%. Average prices were boosted by revenue management initiatives in all our operating segments and a weaker Chilean peso against the U.S. dollar, impacting favorably export revenues of the wine business. Lower volumes were largely caused by weaker consumption in Argentina. Gross profit was down 0.8% at the consolidated level and as a percentage of net sales deteriorated 129 basis points to 47.2% due to higher cost pressures, mainly coming from the devaluations mentioned above, increasing our U.S. dollar-denominated costs. Also, we have had higher sugar prices being partially offset by lower prices in aluminum and especially in PET resins. MSD&A expenses expanded 5.1% and as a percentage of net sales deteriorated 107 basis points. In all, EBITDA dropped 8.3% and EBITDA margin contracted 185 basis points to 16.6%. Regarding net income, it dropped 10.6%, in line with the lower operating results. In the Chile Operating segment, top line expanded 2.9% driven by 3.8% growth in average prices while volumes dropped 0.9% with overall stable market share. Average prices were higher due to revenue management efforts in all our categories, partially offset by negative mix effects in the portfolio. In spite of higher cost pressures due to the devaluation of the Chilean peso, we were able to sustain this margin, which slightly decreased from 47.5% to 47.3%. MSD&A expenses grew 7.5% and as a percentage of net sales deteriorated 137 basis points, mainly explained by higher marketing expenses due to pricing, higher depreciation, and larger U.S. dollar-linked expenses. Consequently, EBITDA contracted 3% and EBITDA margin was lower, from 20.5% to 19.3%. Following with the following segment, in the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 1.6% drop as a result of a 14.7% reduction in volumes, explained by Argentina, partially offset by 15.4% rise in average prices in Chilean pesos. The beer industry contracted in Argentina as a consequence of a challenging economic context, impacting consumer demand, while all the other geographies, Bolivia, Uruguay, and Paraguay posted positive volume growth. The better average prices in Chilean pesos were driven by revenue management efforts in all the countries where we operate. Gross margin deteriorated 586 basis points to 49.4%, mostly associated with cost pressures coming from the 311.8% depreciation of the Argentine peso against the U.S. dollar, together with inflationary pressures. MSD&A expense as a percentage of net sales were flat due to efficiencies which helped to offset a high inflationary context and a lower business scale in Argentina. Altogether, EBITDA contracted 27.1% and EBITDA margin was down 471 basis points, both more than explained by Argentina as the rest of the countries recorded a solid EBITDA growth and improvements in the margins. In the Wine Operating segment, revenues were up 11.6%, mostly driven by higher average prices largely boosted by the weaker Chilean pesos and its favorable effect on export revenues. Volumes also contributed to the top line, increasing 2.7%, mainly explained by exports which were up 3.9%. On the other side, domestic volumes in Chile were flat. Gross profit rose 34.7% and gross margin improved 662 basis points, also due to a lower cost of wine. MSD&A expenses increased 15.8% due to higher marketing expenses related to exports, which are denominated in U.S. dollars, and as a percentage of net sales deteriorated by 118 basis points. In all, EBITDA reached CLP 6,667 million, a 90.7% growth, and EBITDA margin reached 11.3%, increasing 470 basis points, showing a recovery of this operating segment. Regarding our main JVs and associated business, in Colombia, we started 2024 with a low single-digit increase in volumes and gains in profitability due to the appreciation of the Colombian peso. In Argentina, our water business with Danone, as a result of the route-to-market and back-office integration with CCU Argentina, posted a positive net income versus a loss last year despite a steady contraction in volumes. We are working to keep gaining scale in both businesses, which are relevant for our regional multi-category beverage strategy in the region. Now I will be glad to answer any questions you may have.

We acknowledge the questions from Bank of America, Scotiabank, and BTG. Our first question comes from Mr. Felipe Ucros from Scotiabank.

Let me ask you about our competition in Chile. With the fluctuations in the Chilean peso throughout the quarter, what have you observed regarding competitive pressures? Do you see a generally rational sector that adjusts prices to counteract these foreign exchange effects, or is there a lack of discipline in the sector? Additionally, I would like to follow up on wine. It was a great quarter, and it wasn't only due to the foreign exchange; volumes also increased. Now you're above 2019 volumes on a comparable basis. Can you comment on whether restocking is the main driver after several quarters of industry destocking, or how much you think this is driven by actual consumer demand? If it's demand, which regions are the main contributors?

Okay. Thank you, Felipe, for your questions. So I would start by the competitive pressure in Chile. As I mentioned in the previous call, we are cautious about 2024, especially regarding consumption, as it has remained challenging through the first quarter, although a little bit better if you compare to the previous quarter, quarter 4, where we have had unfavorable weather conditions. Let's say, first quarter was better in terms of weather conditions for our business. Competitive, as it is consumption challenging, what we have seen is an increase in terms of promotional activity of our competition. And this led to that they sell at lower prices or flat prices against last year, not even selling with prices in line with inflation. In our side, we kept the pace of having prices at least in line with inflation, and overall, we have protected our market share. However, some categories, we have lost, but marginal loss, especially due to promotions. So the answer to that is that on the other hand, we have FX pressures in our cost, as you mentioned. And this also put us in a challenge in order to protect our margins. So we took further actions end of March to increase prices in some categories. And if this continues, of course, we will continue with the revenue management initiatives while looking also, at the same time, our market share. The very good news is that we are managing outstanding brand health in our portfolio. So especially in our beer portfolio, brand health is at a record. So this could support our better prices without losing extremely high market share. So going forward, I think competition will continue. However, the industry is under pressure on the cost side, especially related to U.S. dollar. But also aluminum prices are increasing, and forward-looking aluminum will also increase. So in that sense, we should be careful about pricing promotions and all this equation of competitive pressure. But the priority is HerCCUles. HerCCUles is about maintaining a relative scale, given this challenging consumption scenario, while at the same time protecting our margins. But the good news is that we have very strong brands that will certainly help us. Your second question regarding wine. Yes, last year was an adjustment year in terms of inventory reduction on the supply chain and the distributors, especially in the Northern Hemisphere. Now we come to a normalization. We started in quarter 4 to see the first positive signs that this adjustment has ended, has reached a final at the end. And if you look at the numbers, the overall growth versus 2019 has increased by 1%, so we recovered already the volumes of 2019 as you mentioned. Going forward, we continue to see growth, but limited growth as we have seen in the first quarter. We are very confident of some initiatives of the Wine business regarding some key markets, especially China, where we opened a commercial office there. That will certainly improve our execution in that market, and also in other key markets where we are improving a lot our execution.

Our next question comes from Mr. Fernando Olvera, Bank of America.

The first one is a follow-up on Chile. Think about this gradual volume recovery expected going forward. Can you comment how volume performed month by month during the quarter? And even any insight that you could share of April would be great. And what are the differences on performance between nonalcoholic and alcoholic beverages? That's the first question. And my second question also on Chile, given the slight contraction in gross margin after the 12 months of improvement, how do you expect gross margin to perform in coming quarters taking into consideration precisely FX volatility, packaging, and sugar costs? That's my second question.

During the quarter, the volume run rate in Chile was relatively consistent each month. There weren’t significant differences between the months, although February saw a slight increase in water sales due to the fires in the central region of Chile. Overall, the volume trend in Chile decreased by 0.9% across the months. In terms of the split between alcoholic and nonalcoholic beverages, nonalcoholic volumes were stable, but we noted a decline in nonalcoholic products, largely due to competitive promotions. Both alcoholic and nonalcoholic volumes were flat, with a slight decrease in alcoholic products attributed to aggressive competition. Regarding margins, we saw a noteworthy recovery in 2023, which helped to increase our margins. However, we are now faced with new pressures, particularly from the exchange rate. A year ago, the exchange rate in Chile was 811 CLP, and it reached an average of 946 CLP during the first quarter, leading to significant devaluation that impacted EBITDA by around $3 million. Our strategy remains focused on enhancing our revenue management efforts. We are taking actions in specific categories and will maintain these actions to protect our market share and volumes while ensuring we safeguard our margins. Additionally, cost control and efficiency initiatives are crucial for preserving the margin gains we achieved in 2023. This year poses challenges due to input costs, including sugar, which eased slightly recently but not enough to counter the pressure from U.S. dollar exposure. I am also concerned about rising aluminum prices, which will affect our packaging materials. PET pricing has been more stable, but the overall environment for input costs remains difficult.

Our next question comes from Mr. Henrique Brustolin from BTG Pactual.

I would like to start with a follow-up on the volume trends in Chile. Could you provide insight on any specific changes within the beer category in the first quarter? Last year, you mentioned a shift where premium beers were losing market share to the core mainstream portfolio. Are you still observing this trend, or is it more widespread across all product segments? Additionally, could you share your thoughts on the volume comparisons in Chile? These should become easier as the year progresses, so how do you view volume performance in the upcoming quarters in that market and the overall strength of the category? On another note, I would appreciate your perspective on the international results for this year. I understand there is limited visibility, but given the circumstances, how are you anticipating volume performance? If macro conditions remain consistent with what we saw in the first quarter, could we expect to see similar levels of margin pressure throughout the year, despite the strong pricing you achieved? These are the two points I wanted to discuss.

Yes, we've encountered some sound issues, but I will do my best to address your questions. The first question was about the beer category and the trends in mainstream versus premium beer. It was a highly competitive quarter with significant promotions, primarily in the premium portfolio. Consequently, we haven't observed a drastic shift between mainstream and premium, as the premium segment was actively promoted. However, we have noticed a decline in premium beer sales since the peak we saw in 2021 and early 2022, which followed the withdrawal of pension funds in Chile. Looking ahead, while we typically do not provide forward-looking statements, current estimates for the Chilean economy predict GDP growth of 2% to 2.5%. We expect to see margin growth and increased industry volumes, especially in the second half of the year, but nothing above GDP growth. Now, regarding international performance, I'll separate the discussion between Argentina and other markets. Other regions are showing strong volume growth, attributed to market share increases. We are pleased with performance in Paraguay, Uruguay, and Bolivia, particularly with the launch of Amstel Beer in Bolivia. As for Argentina, we believe we have hit the bottom regarding consumption, given the declining inflation rates. For the first time in years, we are observing a decrease in inflation, and the 20% drop we have seen in the beverage sector might represent a low point. However, due to the volatility and significant adjustments in the Argentine economy, making predictions is challenging. We could see a recovery, but it's uncertain how quickly that will occur, and predicting positive macroeconomic changes in Argentina carries considerable risks. Our strategy remains focused on controlling costs and expenses while implementing revenue management initiatives, recognizing that the industry is likely to face a decline this year. Nonetheless, we anticipate that the first half of the year will be more difficult than the second half. But again, it's risky to make predictions.

In the meantime, I will read the question from Santiago Petri from Franklin Templeton. "Hello. Could you please give us some insight into the competitive environment in beer in Chile? You mentioned in your statement that the market share was stable despite lower volumes, while your competitor reported higher beer volumes in Chile."

Santiago, it's great to hear from you. The competitive environment is challenging across all categories. It's important to note that CCU is a multi-beverage company, not just a beer company. Overall, our market share in beverages has remained stable and even saw a slight increase. However, we have experienced a small decline in market share in the alcoholic categories, although it's not significant. We're not concerned about that because our brand health indicators are exceptional. This situation was primarily driven by intense promotional efforts from the competition. That summarizes what occurred in the first quarter.

We'll give another minute or so for any additional questions to come through. Okay, we have a question from Thomas Stark.

I have a question regarding receivables, and it looks like receivables increased by more than 30% while sales only increased 11%. Can you provide further details about its sales conditions made on trade, please?

I think you're asking about working capital? Yes, we have seen an increase in receivables. There are several factors at play. One main factor is the route-to-market integration of the water business in Argentina, which has not yet been consolidated. However, we manage the cash collection for this business. As a result of the integration, most of the receivables are now reflected on our consolidated balance sheet. This is one factor. The second factor is a slight increase in due debt, but this is not related to bad debt. It’s primarily due to the timing of the quarter ending during Easter. Typically, customers go on holiday on Thursday of that week and do not transfer their demand, but this issue was fully recovered in the first week of April. So, it’s related to having Easter at the end of the quarter. Another factor was the timing at the end of the month in Argentina. To summarize, we have three factors: the consolidation of the water business receivables from the route-to-market integration; the impact of the Easter holiday at the end of the quarter; and the timing issues in Argentina. There is nothing related to bad debts or similar issues.

It looks like we have no further questions at this point, so I'll pass the line back to the CCU team for the concluding remarks.

Thank you all for attending the conference. In summary, our results were negatively affected by a challenging economic environment in Argentina and the depreciation of the Chilean peso against the U.S. dollar, leading to increased cost pressures. In this context, we are continuing with our six-pillar regional plan, HerCCUles, which involves taking further actions in revenue management and controlling costs and expenses to support the recovery of our financial results and protect our profitability, our main priority. The six pillars of HerCCUles are critical for gradually offsetting negative external factors and weaker consumer demand to achieve our goal of delivering profitable and sustainable growth. Thank you very much, and have a wonderful afternoon.

This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.