Earnings Call Transcript - CCU Q4 2020

Operator, Operator

Good day, and welcome to the CCU's Fourth Quarter 2020 Earnings Conference Call. Today's conference 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.

Claudio Las Heras, Head of Investor Relations

Welcome, everyone, and thank you for attending CCU's fourth quarter 2020 conference call. Today with me are Felipe Dubernet, Chief Financial Officer; and Nicolás Novoa, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated fourth quarter 2020 results. Felipe will now review our overall performance, and we will then move on to a Q&A session. Before we begin, 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 actual 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 Form 20-F filed with the U.S. Security and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce Felipe Dubernet.

Felipe Dubernet, Chief Financial Officer

In 2020, we faced a particularly challenging year due to the COVID-19 pandemic. To handle these, we implemented a regional firm with three priorities: the safety of our people and the community we interact with; secondly, operation continuity; and thirdly, financial health. These allowed us to continue operating and supply our products to all our clients and consumers. According to these, we put in place a strategy which aims to maintain business scale and then gradually recover profitability over time by implementing revenue management initiatives and efficiencies. In terms of volumes, in 2020, we grew 2.2%, reaching 30.7 million hectoliters, despite the strong negative impact on our volumes from the pandemic between April and August, showing a V-shaped recovery throughout the year as follows: an expansion of 6.4% in the first quarter, a drop of 12% in the second quarter, a slight contraction of 1.8% in the third quarter, and a strong growth of 10.6% during the fourth quarter of the year. Regarding financial results, EBITDA dropped 11.7%, and EBITDA margin decreased from 18.4% to 16%, mainly due to negative external effects from the sharp depreciation of the Chilean peso and Argentine peso against the U.S. dollar, and the impact from the pandemic on high margin consumer occasions. These effects were partially compensated with revenue management initiatives, efficiencies from the ExCCelencia CCU program, and lower costs in raw materials. At the net income level, we decreased by 26.1%. In regards to financial health, we kept our net financial debt under control, decreasing against last year. During the fourth quarter, the expansion of 10.6% in consolidated volumes was driven by an 11.7% jump in the Chile operating segment, an 8.3% increase in the international business operating segment, and a 10.9% rise in the Wine Operating segments. The higher volumes were the result of solid commercial and operational execution, which allowed us to respond to a strong demand recovery. In terms of financial results, EBITDA increased by 5.7%, and EBITDA margin improved from 20.7% to 21.1%. The higher EBITDA was mainly explained by the volume growth mentioned above, revenue management initiatives, and efficiencies from the ExCCelencia CCU program, partially offset by negative effects related to the currency translation of our results in Argentina, according to hyperinflation accounting. MSD&A expenses as a percentage of net sales improved by 377 basis points. Net income grew by 0.2%, including a non-recurring negative effect explained by an impairment loss related to Bolivia and properties impairment losses. Excluding these two impairments, net income would have expanded by 9.8%. In the Chile Operating segment, this quarter, our top line expanded by 19.8%, due to an 11.7% growth in volumes and 7.3% higher average prices. The strong performance in volume was driven by all main categories, in line with lower restrictions and a more positive consumer environment, along with gains in market share. The higher average prices were explained by revenue management initiatives and positive mix effects. Gross margin contracted by 357 basis points as a consequence of the negative impact of the pandemic on high margin consumer occasions and higher manufacturing costs. MSD&A expenses as a percentage of net sales improved by 322 basis points in line with cost control initiatives through the ExCCelencia CCU program. In all, EBITDA increased by 16.1%, and EBITDA margin dropped from 25% to 24.2%. The International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, reported an 8.3% increase in volumes and a 33.8% drop in average prices in Chilean pesos during the quarter. The lower average prices were mainly related to negative currency translation effects in Argentina applying hyperinflation accounting, while prices in local currency increased thanks to revenue management initiatives. Gross margin contracted by 54 basis points. MSD&A expenses as a percentage of net sales improved by 385 basis points due to efficiencies from the ExCCelencia CCU program. Altogether, EBITDA decreased by 17.6%, but returned to positive ground after two negative figures in the second and third quarters of 2020. EBITDA margin increased from 16.1% to 18.5%. The Wine Operating segment posted a 4.5% rise in revenue, driven by a 10.9% expansion in volumes, as average prices contracted by 5.7% during the quarter. The volume expansion was driven by the Chilean and the Argentine domestic market, while exports decreased. The lower prices in Chilean pesos were mainly a consequence of a negative mix effect from the higher growth in our domestic markets. Gross margin decreased by 555 basis points, mostly reflecting higher costs of wine. MSD&A expenses as a percentage of net sales deteriorated by 422 basis points, mainly due to higher temporary marketing expenses. In all, EBITDA contracted 36.6%, and EBITDA margin decreased from 23.9% to 14.5%. In Colombia, where we have a joint venture with Postobón, in 2020 we reached more than 1.5 million hectoliters, posting an annual expansion of 21.2%, while the industry contracted. This positive performance, despite a challenging scenario, allowed us to practically double our market share in 2020. The consistent positive trend in Colombia is the consequence of a continuous improvement in brand equity, distribution, and sales execution. In terms of financial results, and in line with a greater business scale, we reached positive EBITDA during the second half of the year, with four consecutive months of positive EBITDA since September. Now I will be glad to answer any questions you may have.

Operator, Operator

And we will take our first question. Please go ahead.

Lucas Ferreira, Analyst from JPMorgan

Hi, good morning, everybody, good afternoon. Thanks for taking my question. I would like to understand a bit better the scenario and the market in Chile. So if you could provide us more details on the beer market. You gained market share; which segments of the market grew the most during the fourth quarter? And where did you gain most of this market share in any specific channel that was stronger in the fourth quarter? And what can we expect for 2021 for the beer market considering, on one hand, Chile is vaccinating superfast, so the reopening of the economy could be also fast. On the other hand, there are no more EFB withdrawals. What was in your view the effect of these withdrawals at the end of last year? So how do you see the market growing in 2021? And my second question is on the cost front. You are seeing, I guess, most of the commodities skyrocketing, I would say aluminum and sugar, and most likely PET considering oil prices. So, wondering if you could give us your outlook and budget for average cost in 2021? Thank you very much.

Felipe Dubernet, Chief Financial Officer

Hello, Lucas, thank you for your questions. First of all, about the market in Chile, specifically you asked about beer. Yes, in fact, we experienced very good growth during the fourth quarter and I would say throughout the year, the beer category has been very resilient but this resiliency was also a trade-off between consumer occasions and packaging. To specifically answer your question in terms of segment growth, definitely one-way packaging grew more than returnable packaging, and this has to do with the closure of the on-premise channel. We experienced high growth in cans and also in one-way longneck bottles. Additionally, towards the end of the year, we saw a good performance in the premium segment, with all premium brands, although it did put a little bit of pressure on supply. Regarding the on-premise channel, it was restricted and gradually recovered towards the end of the year once the restrictions eased. But it's not fully recovered, because still there are restrictions, especially on weekends - in December in Chile, and also because of the curfew. So the on-premise hasn't recovered to the level it had a year ago. In terms of other channels, I would say that the off-premise channel has tremendous growth compared to all the other channels, and grew more than supermarkets. This trend has continued throughout the year, especially in the last quarter. So overall, we saw a very bullish industry in beer in Chile, which is good. However, to give you an outlook for 2021, first of all, we don't do forward-looking statements, but we still have uncertainties. You mentioned that the vaccination is going really well in Chile, and is a benchmark in the world compared to the rest of the world, especially in Latin America. However, we are optimistic, but still, there are many uncertainties, which are difficult to predict. So far, I would say we have had a good start in 2021 with continued strength in terms of volume. You mentioned that there may not be another allowance from the pension funds; that's about policy, we know, but we don't have an exact calculation of what that will mean for our categories. But it certainly played a role in consumption in the last quarter. So, overall in 2021, we see a lot of hope, given the vaccination, and the potential for fewer restrictions, and the improvement of the Chilean economy over last year, supported also by commodity costs such as PET. As for your question about the cost front, yes, we don't live in a perfect world. The ideal situation would mean lower exchange rates and lower commodity prices, which is not the case. We currently have a lower exchange rate, but higher commodity prices in U.S. dollars. We don't provide forward-looking guidance on prices for our budget. However, currently, the prices are indeed higher than what we had anticipated two months ago, but also, we have a lower exchange rate that should offset that. Overall, I am more optimistic in that regard, because the exchange rate weighs much more than the commodity prices. Okay, Lucas.

Operator, Operator

We will take our next question. Please go ahead. Caller, you may be on mute.

Marcella Rechia, Analyst at Credit Suisse

Hi yes, I'm good here. Thank you for taking my question. I have two questions about Colombia if I may. First, could you comment if the 1.5 million hectoliters volume in the country is all beer? And if not, how much is beer only? And if you could tell us what market share this volume represents? I understand that you almost doubled your share in the region throughout 2020. But could you give us some perspective on what your current share level is there? And finally, you are already delivering positive EBITDA in Colombia, right? So do you have any visibility about the net income breakeven? Thank you very much.

Felipe Dubernet, Chief Financial Officer

Thank you, Marcella, for your question. Yes, we are although 2020 was a very difficult year in Colombia, especially in quarter two due to the heavy restrictions. What we saw is a favorable channel conversion that helped us a lot. As a consequence, we were able to expand our volumes more than 20%, reaching 1.5 million hectoliters. Although the base of 2019 was the first year of the launch of our mainstream brand, Andina. In Colombia, we sell beer and malt through the brand, Natumalta, but about 90% of the volumes are beer. We are especially delighted with the success of our Andina brand, which contributes significantly to our gaining market share. We also saw very good growth in Heineken, especially empowered by the launch of Heineken returnable bottles in the middle of the year. Regarding our market share, we don't disclose the exact numbers, but we're talking about mid-single digits, a little more than mid-single digits in terms of market share, which we reached on average during the year, continuing to grow every month. Regarding the financial results, you are correct in saying that we delivered positive EBITDA in the second half of the year. In terms of net income, it depends on many factors, such as exchange rates, commodity costs, and also competition. We expect this year, in the coming months, to approach breakeven on net income, but we don't provide guidance on the exact timing. However, we are moving in a positive direction, I would say.

Operator, Operator

We will take our next question. Please go ahead.

Unidentified Analyst, Analyst

Hi, guys, this is Mohammad Foyston, thank you very much for taking my question.

Nicolás Novoa, Financial Planning and Investor Relations Manager

Hello, Mohammad.

Unidentified Analyst, Analyst

Hi, I hope you guys are all well. I have two questions. One is on COGS inflation specifically in Chile. And the number I see here is almost mid 12% or 13% to 14% for the year. Let me see 12% COGS per hectoliter increase in the year last year. Can you give us any color on how much of it was mixed versus FX? And then the second question I have is on CapEx, how much was the CapEx in 2020 and what should we expect in 2021? Hello?

Felipe Dubernet, Chief Financial Officer

Thank you, Mohammad, I hope you are well. Let me address the cost inflation question, and then I will ask Nic Novoa to answer the CapEx question. Regarding cost inflation, you are correct. It was influenced by two main effects: one effect was the exchange rate. As you know, the Chilean peso faced a considerable devaluation throughout the year, about 13%, and our raw material costs are about 80% linked to the U.S. dollar. So that was the first effect. You also pointed out correctly that mix has an effect, because as I mentioned in the previous question, we switched from returnable packaging, which has lower costs, to one-way packaging which has a higher cost. So this also has an influence, but the main influence was certainly the exchange rate, which started to ease very positively in quarter four, where the exchange rate compared to the same quarter of last year was practically flat, only down 1%. On the other side, we also mentioned in the previous question that we have rising commodity costs, but all in all, it was more favorable, and especially I hope this quarter would be better. Now I hand over to Nico for your question regarding CapEx.

Nicolás Novoa, Financial Planning and Investor Relations Manager

Hi Mohammad, how are you? Regarding CapEx, this year, we have our CapEx around CLP 122,000 million, which is primarily our maintenance CapEx. If you look at our depreciation, it's around CLP 110,000 million. So it's more like maintaining CapEx related to the investment that we need to keep selling and trading. This includes obviously investment in capacity, especially the investment in capacity that we started in Argentina. Looking forward to the next year, related to the volume growth we are seeing in Argentina and especially in Chile, we are expecting a little more CapEx than what we saw this year, which means we are going to need a little more investment in capacity in Chile and Argentina. We will disclose those numbers in our annual report on the 20th. But that's pretty much what we are seeing regarding CapEx.

Operator, Operator

We'll take our next question. Please go ahead. Caller, you may be on mute.

Carlos Laboy, Analyst

Hi, how are you? I was hoping you could give us more insight on Colombia, maybe around three areas. What is your status on your geographic coverage rollout in Colombia? Another question was what can you tell us about repeat consumption for your core brand? And lastly, what can you tell us about the channel mix and the price for your brands? You had said that you'd had a positive channel conversion? What does that mean? What does your channel mix look like right now, and the pricing?

Felipe Dubernet, Chief Financial Officer

Yes. First of all, we are in a different country, but we have a core area around Brunei, where we have all the portfolio, which is the Bogotá region. So we have a higher shedding in Bogotá. However, remember our beer business in Colombia is a joint venture with Postobón, which is the main non-alcoholic beverage operator. So we do use the distribution of Postobón to distribute our products. Therefore, we have full coverage of the country. However, we have a core area with higher presence for returnable packaging, as the proportion of returnable is much higher than one-way in Colombia. In Bogotá, we have a higher presence. Regarding channel mix, during the pandemic, the on-premise channel fell, but started to recover. My comment was in that sense, and as we are new in the market, we are much stronger in supermarkets than in other channels, which saw increased sales. However, I would say that we are increasing our distribution day by day in the on-premise channel, but specifically during the pandemic, supermarkets grew more. That's a bit of the answer.

Operator, Operator

Please, we will take our next question. Please go ahead.

Thiago Duarte, Analyst from BTG

Hello, thanks for taking my question. I have a couple of questions. The first one is regarding transport expenses, which was one of the important savings that you showed in your present results. I would like to know if there's maybe any commodity impact or maybe a strategy impact on your logistics? Also, can you give us a little bit of outlook in Argentina? You are showing more stable margins in these results after having significant decreases in margins, and you have been having a catch-up on that front. So I'd be glad if you can give us some explanation on that and maybe an outlook on what you're expecting in the coming months? Finally, regarding the wine business, there was also a negative impact on costs, so it would be good to know if you will manage this by revenue management and if you are seeing possibilities of countering this profitability pressure in your markets? Thank you.

Felipe Dubernet, Chief Financial Officer

Thank you. Can you give me your name, please, because…

Thiago Duarte, Analyst from BTG

Thiago Duarte, from BTG.

Felipe Dubernet, Chief Financial Officer

Thiago, hello, how are you? Thank you. You asked specifically about transport expenses on the distribution side, right, or about worldwide transport expenses?

Thiago Duarte, Analyst from BTG

Regarding your businesses as we see the…

Felipe Dubernet, Chief Financial Officer

Okay, on one hand, you have the inbound transport of raw materials, which are experiencing higher costs, particularly with China. In terms of domestic distribution, we are linked to variables such as oil prices in Chile, which during quarter four had relatively good prices compared to the same quarter of 2019, along with a decreasing exchange rate, which was somewhat favorable. However, oil prices are expected to rise, given this bullish commodity scenario. This helped us a lot specifically, as we had higher volume, so we needed to hire more fleet, especially in the last quarter. Regarding Argentina, yes, you are correct that we experienced significant changes in results. We had a tough year, especially in the second and third quarters with negative EBITDA and no cash generation. However, we saw a lot of improvements towards the end of the year, and I would say this is very encouraging for 2021. We implemented revenue management initiatives, and our volume did not collapse. In fact, we had very good volume in quarter four and a strong start in January 2021, where we could increase prices, which is good news for Argentina. For the wine segment, we are facing cost pressures due to the cost of wine considering the 2020 harvest that did not go well. Additionally, bad weather in February affected the 2021 harvest that is starting now. The only way to compensate for this is through revenue management, which is easier on the domestic side of the business, in Chile rather than in the export markets. This business would be challenged by a weaker U.S. dollar. So, the only way to compensate is through revenue management where we can, and efficiency improvements.

Operator, Operator

We will take our next question. Please go ahead.

Felipe Ucros, Analyst from Scotiabank

Hi, Felipe, Nicolás, this is Felipe Ucros from Scotiabank. Most of my questions have been asked. So, a couple of follow-ups really: you talked about Colombia. I was wondering if you could give us some details about how brands are doing? How is Andina performing versus Heineken, and how receptive have consumers been to each brand? I see you've gained market share and not really expanded the region. Can you talk about how much of that is due to channel changes and how much is gain within that same channel? Lastly, about Argentina, can you discuss how price controls have evolved and how conversations with the government are going? What do you expect for 2021? Should you be able to increase prices with inflation or above, or do you expect further government intervention?

Felipe Dubernet, Chief Financial Officer

Thank you, Nicolás, for the two questions. Regarding Colombia, as I mentioned, we saw very good performance with Heineken, especially on the premium side. This success was largely thanks to our expanded portfolio, moving from only one-way packaging to include returnable bottles. The Andina brand is where we are building brand equity and also has expanded very well. Some of the growth can be attributed to channel dynamics, but also it is a business where we are building a new brand like Andina, which has potential for gaining more share through brand equity. In terms of Heineken, the expansion of the portfolio has contributed significantly to increasing market share. Regarding Argentina, as I mentioned, we were able to raise prices in January. We were delisted from the previous beer pricing program, allowing us to increase prices in January, which means we are gradually recovering the past profitability we had in the business. You saw the numbers reflecting international business, but mostly it is Argentina, which is a significant portion. We achieved positive EBITDA for the first time and significantly improved our EBITDA margin from 16.1% to 18.5%. Coupled with the price increase in January, it means we are starting the year off on a very good note.

Operator, Operator

And we'll take our next question. Please go ahead.

Barbara Angerstein, Analyst with Itaú

Hi, this is Barbara Angerstein with Itaú. Hi, Felipe, hi Nicolás, everybody there. Just wanted to see if you could comment on the news published last week that some smaller mom-and-pop stores presented a complaint with Fiscalía Nacional Económica about disruptions on supply and low inventory levels in their channel compared to supermarkets? It caught my attention because, as you have commented on previous occasions, the profitability of supermarkets and mom-and-pop stores is quite different. Therefore, it seems a little surprising that there is a lack of inventory there. Can you comment on this, please? Thank you.

Felipe Dubernet, Chief Financial Officer

Hello Barbara, I hope you are well. Yes, I will not refer specifically to that claim because we do not currently have any details or an inquiry from the antitrust or Fiscalía Nacional Económica. That complaint was against the whole industry, not just us. What I can say is that the off-premise channel during the last quarter grew three times the supermarket channel. However, we need to acknowledge that we have had supply issues because we grew double-digit throughout the year. Secondly, the mix has been very affected by the pandemic due to the transition from returnable to one-way packaging, and maybe you saw international reports on the industry showing a worldwide can shortage everywhere. This was one of the consequences of the pandemic. So a tight supply combined with the high growth in all channels during the fourth quarter led to inventory challenges, but we do not have any discriminatory practices regarding sold products across channels. In fact, the off-premise channel grew three times the supermarket channel.

Barbara Angerstein, Analyst with Itaú

Okay. So it seems to be more of an issue that they are selling so much that it's impossible to keep up with the volumes that they sell?

Felipe Dubernet, Chief Financial Officer

Yes, we experienced significant volume growth during the fourth quarter along with supply issues that are evolving positively, but you know it's a very volatile change in mix along with high demand.

Operator, Operator

We will take our next question. Please go ahead.

Santiago Petri, Analyst from Templeton

This is Santiago Petri from Templeton. Hope you are all well? Thanks for the call. My question is, I know, I apologize if it has been answered already; I had some communication problems. I would like to know your assessment of the agreement between Colombia and Andina? If you have any pressure from competition there or any new developments from that agreement? Thank you.

Felipe Dubernet, Chief Financial Officer

Hello, Santiago, I hope you are well too. Yes, it's very public that there is a distribution agreement between Andina and ABI. First of all, it validates our category, multi-category business model that CCU has been empowering for many years. We believe we need to continue focusing on sales execution and brand equity. However, it's too early to provide any comments on that since the distribution started in November. In terms of market share, we did not suffer any losses in Q4 of 2020. But we are prepared to address any potential challenges that may arise.

Operator, Operator

Felipe, we have no further questions at this time. I would like to turn the conference back to your host for any additional or closing remarks.

Felipe Dubernet, Chief Financial Officer

Thank you very much to you all for attending this conference call. In 2020, we were able to protect our people, support the community, and continue operating in all the countries we operate while maintaining the financial stability of our company. At the same time, we protected our business scale by delivering volume growth and setting the ground to gradually recover profitability over time through revenue management initiatives and efficiencies. Looking ahead to 2021, we will continue to face a challenging and uncertain scenario. However, we are optimistic about that. In this context, we will keep focusing on the three objectives set during the pandemic, and we will double our efforts to recover profitability in the coming quarters. Finally, I would like to thank the effort and commitment of all CCU employees, which allowed us to overcome a particularly challenging year in 2020. I am convinced that if we take care of each other and work together, we will emerge stronger from this difficult time to share a better future. Thank you very much and have a very good afternoon.

Operator, Operator

And that concludes today's presentation. Thank you for your participation. You may now disconnect.