Earnings Call Transcript - CCU Q4 2024

Operator, Operator

Good day, everyone. Welcome to CCU's Fourth Quarter 2024 Earnings Conference Call on the 26th of February 2025. Please note that today's call is being recorded. At this time, I would like to turn the conference call over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir.

Claudio Las Heras, Head of Investor Relations

Welcome everyone and thank you for attending CCU's fourth quarter 2024 conference call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; Joaquín Trejo, Financial Planning and Investor Relations Manager; and Carolina Burgos, Senior Investor Relation Analyst. You have received a copy of the company's consolidated fourth quarter earnings release. Felipe will now review our overall results, and we will then move into a Q&A session. As usual, before we begin, please take note of our cautionary statement. Statements made in this call that relate to CCU's future financial results are forward-looking statements, which involve known and unknown risks and uncertainties that could cause our actual performance or results to materially differ. This statement 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. Securities and Exchange Commission, and in the annual report submitted to the CMF and available on our website. It's my pleasure now to introduce Mr. Felipe Dubernet.

Felipe Dubernet, Chief Financial Officer

Thank you, Claudio, and thank you all for joining us today. Before moving into the quarter, I would mention some highlights of the full year 2024. In 2024, CCU delivered higher financial results versus 2023 after a strong turnaround during the second half. Also, we continue to advance in our strategy in a particularly challenging and volatile business environment. Through the year, we faced a low 20% contraction in the beer and water industries in Argentina and modest economic growth in Chile that led to flat volumes in the Chile operating segment. In addition, we experienced cost and expense pressures coming from the depreciation of our local currencies against the U.S. dollar. In this context, and excluding the non-recurring effect of the sale of a portion of land in Chile, in quarter two 2024, full year consolidated EBITDA reached CLP 387,267 million, increasing 2.1%. When including the nonrecurring gain, EBITDA increased 9.6% versus last year. At the same time, also excluding the nonrecurring gain, full year consolidated net income expanded 32.5%. When including the nonrecurring gain, net income increased 52.3% versus last year. The strong turnaround in the second half of the year where consolidated EBITDA surged by 27.7% was mainly explained by a solid performance in quarter four across all of our operating segments, more than offsetting a challenging first half where we posted a 26.5% decline in EBITDA as of June 2024. This upward trend was driven by effective initiatives in revenue management and efficiencies in all our operating segments, enabling us to more than offset the negative impact on our results from the challenging scenario described above. The initiatives mentioned above were executed under the regional plan, HerCCUles, which we started in 2022 and ended in 2024, being key to align the company under six pillars with the objective of recovering financial results, resulting in positive EBITDA and net income growth, well above inflation in the period despite an unfavorable external context that included devaluation of the currencies and low economic growth in the region. Regarding our business strategy, during the year, CCU continued strengthening its regional footprint. In July 2024, we started consolidating our Aguas de Origen, our water business with Danone in Argentina, which will continue bringing synergies to our operations in that country. In October 2024, we increased our scale in Paraguay through a partnership with the BRC Group, which includes the PepsiCo license for the production and distribution of beverages as well as the distribution of snacks. With this association, Paraguay became the second country where the PepsiCo license is part of CCU's brand portfolio, in addition to Chile. At the same time, we continued investing in our brands, achieving strong brand preference, especially in Chile, and reinforced our digital transformation to support sales execution and drive operational efficiencies in the future. Finally, we were the first to inaugurate a modern PET recycling plant, bottle-to-bottle in Chile, named CirCCUlar. Now I will move into the quarter. In quarter four 2024, CCU delivered a solid set of results. Consolidated EBITDA reached CLP 182,621 million, a 65.2% increase. This result was driven by all operating segments. It is important to mention, as we mentioned at that moment, that in quarter four 2023, the application of IAS 29 from IFRS in Argentina generated a loss of CLP 1,095 million in quarter four 2024. Nonetheless, even isolating this mentioned effect due to the hyperinflationary accounting, consolidated EBITDA expanded robustly by 34.9%. In terms of quarterly volumes, excluding the inorganic volumes from the consolidation of Aguas de Origen and the association with Vierci Group in Paraguay, volumes were down 0.1% in quarter four 2024, fully explained by the international business operating segment which continued to contract versus last year, almost fully offset by an expansion in the Chile operating segment, while wine volumes were flat. I would like to mention anyway that Argentina continued to improve its scale compared to previous quarters. Consolidated net income reached a gain of CLP 74,153 million, up by 77.7%, driven by the better operational results and improved non-operating results, particularly in Argentina. In terms of our segments, in the Chile operating segment, the top line expanded 9.9% as a result of a 4.9% increase in average prices and a 4.7% increase in volumes. Average prices were boosted by revenue management efforts, partially compensated by negative mix effects, while volume expanded mainly due to a low comparison base in quarter four 2023. EBITDA expanded 23% and EBITDA margin grew 208 basis points to 19.6%. In the International Business Operating segment, excluding the inorganic volume from the consolidation of ADO and AV in Argentina and Paraguay respectively, organic net sales recorded a sharp increase, driven by higher organic average prices, which more than offset an 11.5% contraction in organic volumes. Higher organic average prices were mostly caused by a low comparison base due to a negative impact on revenues from the Argentinian peso's devaluation against the U.S. dollar in the last quarter of the previous year and, to a lesser extent, revenue management initiatives. EBITDA more than tripled versus last year, driven by all the geographies. The Wine Operating segment posted a top line expansion of 21.4%, driven by a 21.7% rise in average prices, where volumes were flat. Exports expanded during the quarter, being almost fully compensated by the drop in the Argentine domestic market as Chilean domestic volumes were flat. The better average prices were mostly explained by a favorable comparison base, a weaker Chilean peso and its favorable impact on export revenues and positive mix effects. EBITDA posted 16% growth and EBITDA margin was down 74 basis points. Regarding our main joint venture and associated business in Colombia, volume reached 2.3 million hectoliters in full year 2024, increasing 7.8%, and we reached positive EBITDA. Now, I will be glad to answer any questions you may have.

Operator, Operator

Thank you. We will now move to the question-and-answer session. Our first question comes from Fernando Olvera from Bank of America. Please go ahead, sir. Your line is now open.

Fernando Olvera, Analyst

Great. Good morning or good afternoon. Thanks for taking my questions. I have two. My first question is if you can comment on what was the performance in Chile between premium and mainstream beer and how much represents premium of your beer volume now? How do you expect the mix to behave this year? And my second question is how are you thinking about the price elasticity in Chile? Thank you.

Felipe Dubernet, Chief Financial Officer

I understood the first part of your question about the mix between premium and mainstream beer. However, I had some difficulty with the second part. Let me address your first question regarding the performance of premium versus mainstream beer.

Fernando Olvera, Analyst

Yes. And basically, what is your outlook for this year, in these two categories? Thank you, Felipe.

Felipe Dubernet, Chief Financial Officer

So I would say between premium and mainstream is rather stable, the mix in comparing quarter four 2024 and quarter four 2023. The outlook in Chile, so quarter four, the industry was, I would say, soft because although we have a mid single-digit growth in Chile. During the quarter, 4.7%, we grew the volumes. It's worth to say that the comparison base of last year, as we mentioned in our press release at that time, due to weather conditions was a low comparison base. So if we exclude that, we can conclude the industry is rather flat. So I would say, soft. What we expect in the future, it's too early to call because only we have one month, but it was slightly positive, I would say, compared to the first quarter of last year, but it's too early to call, but it would be a soft industry for sure. I would say the economic growth in Chile is expected to be 2% in the long-term. So I do not expect a big jump in the industries. I would say, a similar year in terms of growth of what we experienced a little bit more growth, maybe, but low single-digit growth would be something reasonable. Okay?

Fernando Olvera, Analyst

Okay. And regarding the second question, how are you thinking about price elasticity, thinking about that soft volume?

Felipe Dubernet, Chief Financial Officer

Yes. Overall, in the Chile Operating segment, we have seen volume growth, and they are currently running at a comparable rate. We have increased prices by 4.9% to recover our margins, which were impacted by the significant rise in input costs following the pandemic. Our gross margin is still lower than it was in 2019. Therefore, we must continue our revenue management initiatives. In 2019, we sold 6 million hectoliters in the last quarter, whereas in the last quarter of 2024, our sales reached 6.6 million hectoliters. This sales growth occurred alongside price increases that aligned with inflation, meaning prices are not exactly the same. We have managed to raise prices and concurrently grow the volumes. The first pillar of our HerCCUles strategy was to maintain scale, and we are successfully doing that despite the price increases. However, these price raises haven't completely offset the rising input costs, but we have been able to increase both prices and volumes.

Fernando Olvera, Analyst

Okay. Great. Thank you, Felipe.

Operator, Operator

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

Ewald Stark, Analyst

Felipe, thanks for taking my question. I have a question regarding Argentina. So far in 2025, how have you seen Argentina performing, and what are your expectations going forward? Thanks.

Felipe Dubernet, Chief Financial Officer

Thank you, Ewald, for your question about Argentina. In Argentina, after a significant decrease in volumes during the second and third quarters, where we experienced a decline of between 25% to 28% compared to the second quarter of the previous year, we saw some improvement in the fourth quarter. Our volume decrease was much less severe. To provide some perspective, our seasonally adjusted volume for the first quarter of 2024, excluding inorganic volumes, was 5.8 million hectoliters, compared to 5.6 million in the fourth quarter. While we have not yet returned to the volumes of the first quarter, the second quarter, which was the lowest point, recorded 5.2 million hectoliters. We are observing gradual improvements in January, but it’s still too early to make definitive conclusions. We believe that volume recovery in Argentina will be gradual. However, we do not anticipate a return to the scales we achieved in 2023. That said, as inflation is managed better and economic growth is projected to rise, the industry should continue to recover towards the levels we experienced before the macroeconomic adjustments in Argentina.

Ewald Stark, Analyst

Okay, perfect. And do you have any sense about when 2023 volumes could be achieved going forward, maybe 2026, 2027?

Felipe Dubernet, Chief Financial Officer

It's hard to predict. I would say, perhaps. You pointed out a reasonable timeframe of two to three years, but it hinges on several factors. Argentina still faces many macroeconomic challenges. Will the government lift the restrictions in the end? We are on a positive trajectory, with sequential improvements, but forecasting when we will regain scale in Argentina is tricky since the country currently navigates a unique micro and macroeconomic landscape. A key question might be when hyperinflation will be addressed for accounting purposes. While we have seen positive results concerning inflation, salaries and employment still need to recover, meaning that macro factors must improve as well. Only then can we better address when we might restore scale in Argentina. However, our results from the past quarter four and early January indicate that we are seeing sequential improvement since quarter three, with quarter three being more moderate, quarter four showing better results, and we expect further improvements in quarter one, continuing our path towards recovering scale.

Ewald Stark, Analyst

Okay, perfect. Thanks. Have a nice day.

Operator, Operator

Thank you. We have a question from Martin Zach from Fundamental Capital.

Unidentified Analyst, Analyst

Should we expect margin recovery during 2025 and 2026? Would that recovery come on the back of price increases going ahead of cost inflation?

Felipe Dubernet, Chief Financial Officer

Thank you, Martin, for your question. The results from the last quarter are encouraging, particularly in the tile segment. We've recovered our margin path, and for 2024, we expect to have the same margin as in 2021 when our volume was very high. Overall, the situation is challenging and quite volatile, heavily influenced by external factors like the exchange rate. For instance, if you were to ask me this at the start of the year with the Chilean peso at 1,000 per U.S. dollar, improving the EBITDA margin would have been difficult. However, we will persist in our revenue management and efficiency initiatives to show sequential margin improvements. Revenue management is crucial; it involves not just increasing prices but also managing promotions effectively. Therefore, margin improvements will mainly come from revenue management and efficiencies rather than from volume increases. In Chile, we anticipate improvements, and in Argentina, we expect to continue our sequential recovery in margins.

Operator, Operator

Okay. Thank you. It looks like we have a follow-up question from Fernando Olvera from Bank of America. Your line is now open. Please go ahead.

Fernando Olvera, Analyst

Hello, guys. Thank you for taking my question again. Maybe if you can comment about the wine division. I mean, your volume is still far from the peak reached in 2021. So how do you expect volumes to behave this year? And what is your outlook on export and the corresponding domestic markets? And also, if you can comment about Colombia, about volumes in Colombia, how are you seeing the behavior this year given the solid growth that we saw in 2024? Thank you.

Felipe Dubernet, Chief Financial Officer

Regarding the Wine division, I will break your question into three parts since we operate in different markets. First, for exports, we have not yet returned to the scale we had before the pandemic and are currently 13% below the 2019 export volumes from Chile. The growth of 4% in 2024 is a first step towards recovery. The pace is moderate, but we expect continued recovery, especially with the establishment of our commercial offices in China, the U.S., and the UK. This initiative will enhance our execution in these key markets, alongside recovery in other areas like Korea. Overall, we anticipate recovering and growing this year as we work towards regaining our market presence. It’s challenging as the market is highly competitive, and we have experienced destocking among our clients in 2023. Looking ahead, 2024 shows growth, but we are still far from pre-pandemic volumes. Innovation is another crucial factor since this category is not growing globally. Now, turning to the Chilean domestic market, we have actually exceeded pre-pandemic volumes, maintaining our scale and improving margins through price increases. This segment is performing well, and we remain market leaders, with innovation playing a significant role. In Argentina, however, we faced challenges in the domestic market this year. Overall, we foresee growth in exports while maintaining our leading position in Chile. The recovery of export volumes is essential moving forward.

Fernando Olvera, Analyst

Excellent. And regarding Colombia...

Felipe Dubernet, Chief Financial Officer

Regarding Colombia, we achieved high-single-digit growth, increasing our market share thanks to the strong performance of Andina Light and Tecate. We recognize there is still room for improvement in our execution, and the team in Colombia is working diligently on this. Collaborating with our partner, Postobón, we are focused on enhancing our sales execution while also boosting brand preference in the region. We are very pleased with the performance of Andina Light.

Fernando Olvera, Analyst

Okay. So do you expect the good performance to continue?

Felipe Dubernet, Chief Financial Officer

And as I mentioned, we reached a positive EBITDA, which is very important to continue to invest behind the brands.

Fernando Olvera, Analyst

Okay. Perfect. Just a quick one about the massive blackout from yesterday in Chile. I mean I was just wondering if that blackout affected, in some way, your operation, if it was highly affected or not?

Felipe Dubernet, Chief Financial Officer

No, not significantly. We lost one production shift, but we only have backups for essential production, such as keeping the beer in fermentation plants. Our distribution is not a heavy electricity user, so we had full backup. We successfully delivered all customer orders without any disruption. The lost production shift is not significant since we can extend some shifts going forward to recover what we lost. Our contingency plans worked perfectly in IT and our data centers, allowing us to completely deliver products to our clients.

Fernando Olvera, Analyst

Great. Thank you, Felipe.

Operator, Operator

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

Constanza Gonzalez, Analyst

Good afternoon, Felipe, and team. Thank you for taking my questions. I have two. The first one regarding CapEx, what is the CapEx that you are expecting for this year? And I appreciate if you can make the separation between investment and maintenance. And the second one is just regarding CapEx, too. Do you have any targets regarding the EBITDA that you prepared to invest in the near future? Thank you.

Felipe Dubernet, Chief Financial Officer

Hello, Constanza. Thank you for your question about CapEx. We can say that CapEx relative to depreciation will be slightly above inflation. Our CapEx will be a bit more than depreciation, but much lower than the levels observed in previous years, specifically between 2019 and 2022, which marked a period of significant expansion in volume capacity. The average CapEx ranged from 1.3% to a peak of 1.7% in 2022. Moving forward, we expect it to be between 1.1% and 1.2% due to a softer industry outlook, at least in 2025, and the need to recover scale in Argentina. Therefore, we anticipate a more moderate CapEx moving forward. As a percentage of sales, CapEx averaged between 7% to 7.5% from 2019 to 2022, whereas for 2023 to 2025, we expect it to be around 5.5%. That's regarding CapEx. Could you repeat the second part of your question?

Constanza Gonzalez, Analyst

Of course. Do you have any target regarding CapEx versus EBITDA? Or it's not a measure that you follow?

Felipe Dubernet, Chief Financial Officer

The metrics I mentioned are the metrics we use. CapEx as a percentage of net sales, as I mentioned, we don't have specific numbers because CapEx needs to be flexible in case there is a surge in industries; you need to invest in capacity. Currently, the main focus of CapEx is shifting towards efficiencies and regulatory compliance. A significant increase in CapEx last year was due to the construction of Circular, a plant dedicated to recycling PET bottles. Therefore, it's more associated with environmental initiatives and efficiencies rather than just expanding capacity. I believe our level of CapEx should align with the industry average, which we have observed to be between 5% to 8%, depending on our needs. There isn't a specific target, but this would be the expected level of CapEx, slightly above the rate of depreciation.

Constanza Gonzalez, Analyst

Thank you, Felipe. I have another question. Regarding net financial debt over EBITDA. Are you evaluating some range in the next year? Or are you comfortable with where your current levels?

Felipe Dubernet, Chief Financial Officer

In general, we are within the range. While we don't have a public target, when we compare ourselves to the industry and other sectors, I believe we maintain a reasonable level in terms of our investment grade, which is very important for us. We need to stay within that range. As mentioned, we expect to have slightly less capital expenditure over the next three years as we transition from 1.5 times inflation to 1.2 times depreciation. This indicator will see improvements. In the last quarter, we reduced our net financial debt-to-EBITDA ratio from 2.2 times to 1.8 times, which shows we are on the right track. Maintaining our investment-grade rating is crucial for us.

Constanza Gonzalez, Analyst

Thank you so much for your answers.

Operator, Operator

Okay. Thank you. Our next question is from Alvaro Garcia from BTG Pactual.

Alvaro Garcia, Analyst

Can I ask about Chile cost inflation outlook specifically and your outlook on how this might impact the rationality of pricing in Chile over the next year? Thank you.

Felipe Dubernet, Chief Financial Officer

Okay, Alvaro. Thank you for your question. Regarding cost inflation, as I mentioned in the previous question, it's very volatile because it's very different in this business. With CLP 1,000 per dollar exchange rate, it's very different than CLP 940. These are CLP 60, and you know it's 1% of devaluation is a lot of money in our P&L that we need to compensate with efficiencies or with pricing. Because, as I mentioned, we will not have great news from volumes. So, at the end, that's key for us. If the dollar going forward is maintained in a range of CLP 940, I would say it is reasonable to increase the prices in line with inflation a little bit above inflation. And this is the aim. Usually, in the long-term, CCU aims to increase price in line with inflation. Our ability to increase prices would depend on several factors. And one of the factors is competition, of course, but more than thinking about the competition, we need to think about ourselves, and this is what is key, and it was a big pillar in HerCCUles and continues to be a very important KPI for us is brand itself. The stronger our brands are, the more our brands are in the hearts of the consumer, the better price we can get for our brands. Even if the competition does promotions or discounts, we need to rely on our brand equity in order to sell at better prices. Of course, is key, as I mentioned, the volatility in the market. But if we have a scenario of CLP 940, I would say it is reasonable to increase the prices in line with inflation a little bit above inflation.

Operator, Operator

Okay. Thank you. Our next question comes from Francisca Taverne from LarrainVial.

Francisca Taverne, Analyst

Have you seen competition regarding price increases in the beer market in Chile? Have they followed in the last months?

Felipe Dubernet, Chief Financial Officer

Yes. In the last quarter, we have been increasing prices on certain specific packages because some packages are less profitable than others. We have adjusted these packages, particularly the larger ones, especially in the beer category in Chile. Additionally, many companies have faced challenges regarding margins compared to pre-pandemic levels, so we need to work on recovering profitability. Generally, the industry has raised prices during this time. This reflects a combination of overall industry pricing and brand equity, which influences not just pricing strategies but also how we approach promotions. This aspect is essential in a highly competitive market like Chile.

Operator, Operator

Thank you. We have a question from Sergio Winter from Falcom Capital. In your press release, you mentioned that HerCCUles has already concluded. Are there any other plans or measures to continue working on efficiencies in 2025?

Felipe Dubernet, Chief Financial Officer

Sergio, thank you for your question. Maybe we haven't been very clear in the press release, but we are mentioning that, of course, HerCCUles as a name, as an idea, as a brand ended in 2024. It was a three-year plan in order to recover our results against 2022 that was, in fact, a very disappointing year in terms of results. And in fact, we recovered EBITDA growth and especially net income growth that was above inflation in that period. So now going forward, as we mentioned, our focus will be on developing our 2025-2027 strategic plan, reinforcing our three pillars: profitability, growth, and sustainability. So HerCCUles ended. But many elements of HerCCUles are still present and will continue to be present in our 2025-2027 strategic plan. In the upcoming annual report that we will issue according to the regulation going forward, we will be more specific and give more color on different KPIs of that new strategic plan 2025-2027. But many elements of the plan would continue, especially in terms of profitability, where we need to continue to recover gross margin because this is what suffered the industry as well, reducing our expenses as a percentage of net sales in, let's say, efficiencies at gross margin level and efficiencies also at expenses level in order to protect our bottom line going forward. But it is worth saying that HerCCUles was a successful plan in order to recover, to some extent, despite the external effects we had, the contraction in Argentina at the HerCCUles path in the delivery of the results that are shown especially in the last quarter.

Operator, Operator

Okay. Thank you. We are not seeing any further questions. Thank you, everyone, who asked questions. I'll be handing the line back to the CCU team for closing remarks.

Felipe Dubernet, Chief Financial Officer

Thank you, all for attending this conference call. To conclude, in 2024, we posted a strong turnaround in our financial results during the second half of the year, expanding EBITDA and net income versus 2023 in a challenging business scenario. At the same time, we strengthened our regional footprint. Looking ahead, we are cautious about 2025 as the business scenario will remain volatile and uncertain. Our focus will be on developing our 2025-2027 strategic plan, reinforcing our three strategic pillars: profitability, growth, and sustainability, with a special focus on profitability through revenue management efforts and efficiencies. Finally, I would like to extend my gratitude to all our employees; their dedication and commitment have been key to navigating challenging times. We will continue to work to ensure sustainable and profitable growth for CCU. I wish you a wonderful afternoon today. Thank you.

Operator, Operator

That concludes the call. Thank you, and have a nice day.