United Breweries Co Inc Q1 FY2025 Earnings Call

Welcome and thank you for attending CCU's first quarter 2025 conference call. Today with me are Mr. Patricio Jottar, Chief Executive Officer; Mr. Felipe Dubernet, Chief Financial Officer; Mr. Joaquin Trejo, Financial Planning and Investor Relations Manager; and Carolina Burgos, Senior Investor Relations Analyst. You have received a copy of the company's consolidated first quarter 2025 earnings release. The goal is to review our overall results, and then we will move on to our Q&A session. As usual, before we begin, please take note of the following statements. Statements made in this scope that relate to CCU's future 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 with the U.S. Securities and Exchange Commission, and the annual reports submitted to the CMF available on our website. It is now my pleasure to introduce our CEO, Mr. Patricio Jottar.

Thank you, Claudio, and thank you all for joining us today. In the first quarter 2025, we delivered higher financial results versus last year, expanding consolidated EBITDA and net income by 6% and 10.7% respectively, in spite of a highly volatile business environment. In this context, organic consolidated volumes, excluding the volumes of Aguas de Origen and AD in Argentina and Paraguay respectively, were down 1.8%, given by all operating segments amid soft consumption in the region. The higher EBITDA was explained by international business operating segments, largely due to Argentina. We're certain that the scenario for 2025 will continue to be challenging and volatile. Our focus in the coming quarters will be to continue implementing our 2025-2027 strategic plan and its three pillars: profitability, growth, and sustainability, with a special focus on profitability through further efforts in revenue management and efficiency. At the same time, under the growth pillar, in a difficult context for expanding business scale, we'll focus on brand equity, sales execution, and innovations to address new consumer trends. Lastly, in the sustainability pillar, our goal is to progress in our Juntos por un Mejor Vivir strategy in its two pillars, our Planet and our People. The figures that I will refer to now for the consolidated and the international business operating segment results consider organic figures, excluding again the consolidation of Aguas de Origen in Argentina and AD in Paraguay. Regarding our consolidated performance in first quarter 2025, organic consolidated net sales were up 3%, explained by 4.9% higher organic average prices in Chilean pesos, while organic volumes were 1.8% lower. Higher organic average prices in Chilean pesos were explained by all operating segments as a consequence of revenue management efforts. Gross profit grew 1.7% organically, and organic gross margin contracted by 56 basis points due to higher cost of sales. On the other hand, organic MSD&A expenses expanded 2.7% in Chilean pesos, offsetting inflationary pressures with efficiency. And as a percentage of net sales declined 11 basis points. In all, organic EBITDA reached CLP 130,006 million, a 4.8% organic increase. In terms of our segments, in the Chile Operating segment, the top line expanded 2.8% as a result of a 4.8% increase in average prices while volumes were down 1.9%. Average prices were driven by revenue management efforts, partially compensated by negative mix effects in the portfolio. Gross profit decreased 1.1% and gross margin was down 180 basis points compared to last year, mainly driven by higher manufacturing costs, a negative mix effect in packaging, and cost pressures coming from higher U.S. dollar denominated costs. MSD&A expenses were 2.7% higher, being practically flat as a percentage of net sales due to efficiencies that compensated inflationary pressures. Altogether, EBITDA reached CLP 94,400 million, a 2.4% decrease, and EBITDA margin was down 97 basis points. In the International business operating segment, excluding the inorganic volumes from the consolidation of ADO and AV in Argentina and Paraguay respectively, organic Net sales recorded a 6.3% increase driven by higher organic average prices, which more than offset a 1.2% contraction in organic volumes. Organic volumes in Argentina were nearly flat, continuing on a recovery path of business scale compared to previous quarters. Meanwhile, Uruguay and Paraguay posted low and mid-single digit organic volume declines respectively, while Bolivia grew by low-single digits. Higher organic average prices were mostly driven by revenue management initiatives in all the geographies, more than offsetting cost pressures coming especially from a weaker ARS against the USD, and inflationary pressures. Consequently, organic gross profit expanded 10.7%, and organic gross margin grew 202 basis points. Organic MSD&A expenses as a percentage of net sales increased 32 basis points, mostly from inflationary pressures in Argentina. In all, organic EBITDA reached CLP 33,435 million, a 28.1% expansion, driven by Argentina, Uruguay, and Bolivia. The U.S. operating segment posted a top-line expansion of 2.1% fully driven by a 6.2% rise in average prices, while volumes were down 3.8% compared to last year. Lower volumes were explained by a contraction in the Chilean domestic market industry, while exports from Chile were flat. The better average prices were mostly explained by a weaker Chilean peso and its favorable impact on export revenues and revenue management initiatives in the domestic markets. Gross profit was down 1.6% and gross margin declined by 142 basis points due to cost pressures from a higher cost of wine and higher U.S. dollar lean packaging costs. MSD&A expenses were flat and as a percentage of net sales improved 56 basis points due to efficiency. Altogether, EBITDA reached CLP 6,592 million, a 1.1% decrease, and EBITDA margin was down 36 basis points. Regarding our main JVs and associated businesses, in Colombia, we posted better financial results versus last year despite a slight contraction in volumes, which nonetheless was slightly lower than the industry. Now I will be glad to answer any questions you may have.

Okay, so our first question is from Fernando Olvera from Bank of America. Your line is now open. Please go ahead.

Hi, good morning everyone and thanks for taking my question. First, I would like to explore volume performance in Chile. If you can give us some details of how different the performance was between non-alcoholic and alcoholic beverages and specifically on beer. Also, if you can comment about the performance between premium and mainstream? That's my first question. Thanks.

Thank you, Fernando, for your question. Look, according to Nielsen, our overall market share in the Chile operating segment is stable. Now, making a double click, we have gained some market share in non-alcoholic beverages but we have lost some market share in beer. It is important to highlight that the overall alcohol industry is decreasing in its single digits. These are sell-out volumes to consumers. Companies publish selling volumes to clients across different channels and thus are not necessarily reflected in market share. But again, market share in the Chilean operating segment is stable, with a small increase in non-alcoholic beverages and a small decrease in beer.

Okay, and regarding the recovery going forward on volumes, how are you seeing such trends?

Excuse me, regarding mainstream and premium. So, regarding mainstream and premium, it is stable. Look, looking forward, there is a big concern not just in Chile but in the world regarding alcohol consumption patterns. This is probably something you have heard about because it is a topic discussed in many companies producing and selling alcohol all over the world. The figures are telling. Let's analyze the consumption of alcohol at 100 degrees. To make this calculation, you consider beer at 5%, wine at 12%, spirits at 35%, and tea is 40%. If you take into account other spirits and calculate the per capita consumption of alcohol at 100 degrees, this figure in Chile in 2019 was 5.3 liters of alcohol per capita per year. During the pandemic, it increased significantly and after the pandemic, it began to decrease. In 2023 it remained at 5.3, the same level as pre-pandemic. However, in 2024 it decreased to 5.1. The trend at the beginning of 2025 is also a decrease. Similar figures for the United States: 7.4 in 2019, 7 in 2024. The decline in the United States has been even higher than in Chile. Looking at global figures, the world overall saw a drop from 3.1 liters in 2019 to 2.8 liters in 2024. There are various hypotheses as to why this is occurring. If you want, we could discuss this in detail. My main concern regarding the future is volumes in the alcohol categories. I don't see a disaster or a big collapse, but trends are not favorable. We are making numerous efforts to change the trend, emphasizing responsible consumption.

Okay. And if I may just one last question. If you can give us more details on the lower tax in Argentina, which I understand caused the sharp decline in consolidated taxes, and if this effect is expected in the coming quarters? Thank you.

I understand your question. This is related to the use of inflation for tax purposes. Until 2019, we did not use inflation for tax purposes in Argentina. Since 2019 we began to do so. We have some provisions related to that. As Argentina has become more stable in terms of macroeconomics and with the liberation of exchange controls, we decided to release some provisions related to the use of inflation for tax purposes, which explains the sharp decline. To sum up, this benefit is expected in coming quarters.

Yes. Yes. The benefit is gravel.

Fernando, one more remark regarding alcohol consumption trends. My previous comments highlighted a decline in Chile and the United States and globally. On the alcohol consumption front, this is a long-term consideration. In Q2 last year, we saw very poor results in Argentina and Chile. We anticipate much improved results for alcoholic volumes in Q2 this year. But excluding this consideration because it is based on 2024, the trend is not favorable for the industry.

Okay. Great. Thank you so much.

Thank you. Our next question is from Alvaro Garcia from BTG. Your line is now open. Please go ahead.

Can you hear me?

Yes, we can. Please go ahead. Alvaro, we cannot hear you now. Okay. Perhaps you can send us a text question or redial.

Can you hear me there?

Now we can. Yes.

Sorry about that. Wrong mic. Hi Patricio, hi Felipe. I have a couple of questions. One on how you are thinking about margins in Chile in a stronger Chilean peso environment into the second half of this year. Obviously, you have had a lot of questions over the last couple of years on sort of where you can take margins over the medium term. And we seem to be getting in a better sort of input cost environment for you. So that would be interesting. And then my second question is on Argentina. I was wondering if you could talk about pricing. Because we were a little bit surprised. I mean I know you are consolidating a water business, which obviously has much lower pricing. But I was wondering if maybe you can comment a bit on pricing. There was a little bit of a surprise let's say in our model there. What you are seeing from a pricing standpoint as inflation comes down? Thank you very much.

Thank you Alvaro for your two questions. I will begin with Argentina and then I will jump to Chile. Look, it's a big question mark. For many years, prices were key in Argentina. We had little difficulty increasing prices in line with inflation, often higher than inflation. If inflation is 10% and we increase prices by 11% or 12%, nothing happens; consumers continue buying our products. Now, inflation is decreasing significantly. Following the liberation of the exchange rate, it has remained almost stable. There are different opinions regarding what will happen with inflation in Argentina: Some think it will continue to be 2% per year, others believe it will drop to zero quickly, and some predict negative inflation. The second remark is that some services are adjusting their prices, leading to hidden inflation from rate-controlled prices. We expect that the price increase of the consumer products industry will be lower than official inflation due to this effect. We are uncertain; however, I prefer to assume that inflation will be very low which would make it difficult to continue increasing prices, but we hope to offset this with input costs and strong efficiency programs. In summary, if inflation remains high at 2%-3%, we will keep increasing prices in line with inflation. Otherwise, we would find ourselves with a big gap. In both cases, we are actively managing to reduce expenses. Regarding margins in Chile, we have been increasing prices to compensate for those that we didn't increase earlier when raw material costs surged. We are recovering margins quarter by quarter and expect this trend to continue. With lower input costs, we are being very strict about efficiency with our expenditure. Overall, we anticipate improvements in our margins, but the comparison basis in Q2 2024 was weak. Thus, we will see a strong Q2, but this will be compared to an exceptionally weak basis from last year.

Great. Thank you. A follow-up on the Argentina element. Would you say that in the first quarter, you passed a little less price than usual? Or was it just pretty standard from a core organic standpoint?

Yes, definitely less. In 2024, we passed higher prices than inflation. In Q1, this trend continued, and in Q2, it's extremely difficult to increase prices. I suspect inflation will collapse very soon. I personally think inflation will move in the range of 0% to 0.5%, possibly a max of 1% per month. From what we see in our categories, consumer goods prices are stable and it is tough to increase prices.

That’s clear.

Our next question is from Felipe Ucros from Scotiabank. Your line is now open. Please go ahead.

Thanks operator. Well, Patricio, Felipe, and team thanks for taking my question. My first one is around costs. The release mentioned that you experienced higher manufacturing costs in Chile. I was curious about the language about it being around manufacturing rather than raw materials. Can you expand on what exactly were the drivers for these costs? And then I will have a follow-up after that. Thank you.

Indeed, Felipe. Could you please provide more details?

The manufacturing costs were influenced by two main factors. First, there was inventory depletion. As we reduced our inventory, the allocation of fixed costs increased compared to a year ago, which is an accounting matter. The second factor was higher labor costs needed to enhance our operational plan. We had to pay for overtime, which contributed to these elevated labor costs, and we also wrote off old lines that we no longer use, which were replaced by new technology. This led to additional depreciation costs. The write-offs were recorded in the depreciation line for the Chile operating segment. As Patricio mentioned, we had two write-offs: one for the Chile operating segment and another for reduced inventory from last year, both affecting fixed expense allocations. We also incurred overtime due to inefficiencies, but we have a project underway to address this. We expect to achieve improvements and enhance manufacturing efficiency in the upcoming quarters.

Very clear. And my next question was about efficiency. You managed to maintain your efficiency levels despite having negative volumes. Which is not easy to do? So it seems like your efficiency program is beginning to work. Can you expand a little bit on how far along you are in that program and how much more you expect?

Thank you for your remarks. More than beginning to work, it has worked for many years. Here we have the figures but the MSD&A has declined by over 5% in a long period of time. But we are applying much more pressure today. As we expect tough volumes of alcoholic products in the future, as I mentioned earlier, and we expect to face tough times in Argentina. We are making stronger efforts to be efficient. We are moving in that direction.

Let me ask a follow-up on the efficiency side. Are you reducing marketing expenses in any way? Or is that part of the SG&A, kind of the plan is to maintain it consistent and draw efficiencies from other lines?

No. Particularly regarding sales efforts, we are replacing many functions done by salespeople with technology, achieving great success. In summary, over the years, our sales representatives had four responsibilities: to recommend that the client consider buying, to execute the order, to ensure execution at the point of sales, and to maintain a good personal relation with the client. The first two responsibilities could now be replaced completely by technology. Today, our artificial intelligence programs are far superior to our sales force in recommending purchases. There are much more efficient ways to place orders digitally. Sales force remains extremely important to execute at the point of sale and maintain personal relationships. We need fewer salespeople and more technology. If you examine our MD&A, especially in Chile, which is the main operating segment, expenses have decreased below inflation by 2.7%, while marketing expenses increased above inflation. This shows that we are driving efficiencies in sales as well as distribution. Distribution remains critical as it represents significant expenses. We are moving in the right direction with our efficiency program. If we continue on this path of raising our expenses below inflation while maintaining or improving our marketing investment, it’s a good sign. Additionally, we measure brand equity for each of our brands and our competitors’ brands quarterly, and the indicators for Q1 2025 show our brand equity is at one of the highest levels in the past 10 years, which assures us of strong volumes, market shares, and prices for better profitability.

Very clear. Thanks a lot for the color.

Thank you. Our next question is from Ewald Stark from BICE Inversiones. Your line is now open. Please go ahead.

Good morning. Thanks for taking my question. In the press release, you mentioned that competition and the context remain highly volatile, and you expect it to continue to be so in the coming quarters. I wanted to ask how you expect competition — how aggressive do you expect competition to be in Chile for the remainder of the year?

Thank you, Ewald, for your question. Look, competition in our sectors has always been tough. I know the categories where we operate in Chile and other countries, and I expect this to continue. The tough element of having fierce competition makes it challenging to increase prices and margins, but it also drives per capita consumption, which is critical for us. As I previously noted, the alcohol consumption globally is under pressure for various reasons. High competition, innovation, and marketing contribute to offset those trends. Let me provide you with a clear example: Per capita consumption in Chile for beer has grown from 44 liters in 2014 to 54.2 in 2024—an increase of 10 liters per capita. In the United States, it rose from 34 to 46.2 liters. The overall global average consumption, however, fell from 25.4 liters to 22.7 liters. We have been competing aggressively, and I expect this trend to continue, which prompts us to strengthen our capabilities daily.

Thank you. Our next question is from Constanza Gonzalez from Quest Capital. Your line is now open. Please go ahead.

Good morning, Patricio and Felipe. Thank you for the call and for taking my question. I have a question regarding Argentina. Considering that you are seeing a recovery in the economy, do you expect that volumes in the next quarter are going to increase? My second question is regarding the degradation of the economy, and do you expect to bring more dollars from Argentina to Chile? Could you provide some insights on that change? Thank you.

Indeed, Constanza. Look, regarding volumes in Argentina, before the adjustments made by Mr. Milei, when inflation was extremely high, consumers had a lot of disposable income. Before the adjustments, volume performance across the industry was measured as 100. The worst moments for the industry were in Q2 and Q3 of 2024, when volumes decreased significantly by 20%. Currently, we are around 90%. As of now, we’re in the middle ground between pre-adjustment and the worst post-adjustment moments. My second remark is: The worst period of adjustment was Q2 and Q3 of 2024. We expect solid growth in volumes compared to those figures. However, the current level of volume is still 10% lower than pre-adjustment volumes. Addressing your second question, I will ask Felipe to elaborate.

This was regarding the new measures announced on April 14 by the Argentinian government. The Central Bank announced an agreement with the International Monetary Fund, which is positive, but also included a comprehensive financing package and a new regulatory framework for exchange rate controls. These announcements bode well for future results because from 2025 onwards, we will be able to bring dividends from Argentina, which is positive for our overall financial outlook. I cannot definitively say whether we will bring dividends or not; it will depend on our results and other accounts. Additionally, it was announced that there could be a bonus for the reconstruction of a free Argentina, allowing us to settle some accounts with commercial partners related to foreign rate exposures in our P&L, which is an added positive. Of course, the first priority will be to settle these accounts, and then, definitely, we can consider bringing dividends from the results starting in 2025 and beyond.

Okay. Thank you for your answer. I have a follow-up question. In relation to margins, what level of EBITDA margin do you feel comfortable with for the long term?

We do not provide long-term projections publicly. However, we aim to recover the EBITDA margin in both Chile and Argentina.

Thank you. We have a follow-up question from Fernando Olvera from Bank of America. Your line is now open. Please go ahead.

Great. Thanks for picking up my question again. I would like to hear your thoughts about the weak demand in wine, in both local markets and exports. Is there any other reason besides a lower demand for alcohol? And also, how do you expect volume to behave for the remaining year ago given that you will face easier comparisons? Thank you.

Thank you, Fernando. I previously mentioned the trends toward reducing alcohol consumption across the entire category. However, upon examining the wine category specifically, it has been the one suffering the most. Looking at figures in Chile for 2019, the per capita wine consumption was 12.7 liters; by 2024, it decreased to 10.5 liters. In the United States, per capita was 9.8 liters in 2019 and fell to 8.4 liters in 2024. Globally, the average dropped from 3.8 liters to 3.3 liters. Among all categories, wine is experiencing the most significant decline, whereas beer and spirits have been able to maintain some stability due to innovation and growth in new products like flavored alcoholic beverages. We are pushing strongly for low-alcohol options, non-alcoholic products, and sparkling wines without alcohol. We anticipate these categories to grow in the future. Regarding this year, we prefer not to disclose public forecasts. Of course, we have our internal expectations, but we choose not to reveal them. However, as I mentioned, the trend for wine consumption is challenging. We attempt to counter these trends by promoting the rising demand for flavored and low-alcohol products, which we believe can significantly contribute to our volume and margin growth.

Okay. Great. Thank you so much for the insights.

Thank you very much. I will now be passing the line for the CCU team for the closing remarks.

In summary, in the first quarter of 2025, we were able to deliver higher financial results, expanding EBITDA and income in a challenging business environment due to volume pressures and ongoing cost challenges. In line with our priority of achieving profitability, we have implemented revenue management across all operating segments while continuing to drive efficiencies. Furthermore, in 2025, we are celebrating 175 years of history. We have overcome many challenges by being a dynamic and innovative company capable of adapting to transformations in Chile and the other countries where we operate. This past experience will be crucial in navigating the current uncertain business environment, particularly regarding consumption trends and currency fluctuations. Therefore, we continue to implement our 2025-2027 strategic plan, supporting our multi-category strategy to ensure sustainable and profitable growth for CCU.

This concludes the call for today. Thank you and have a nice day.