Earnings Call Transcript - CCU Q2 2024

Operator, Operator

Good afternoon, everyone, and welcome to CCU's Second Quarter 2024 Earnings Presentation Call on the 8th of August. Please note that this call is being recorded and all participant lines are in listen-only mode. After the presentation is completed, there'll be an opportunity to ask questions. So without further ado, I would now like to pass the line over to Claudio Las Heras, Head of Investor Relations at CCU. Please go ahead, sir.

Claudio Las Heras, Head of Investor Relations

Welcome everyone, and thank you for attending CCU's second quarter 2024 conference call. Today with me are Mr. Patricio Jottar, Chief Executive Officer; Mr. Felipe Dubernet, Chief Financial Officer; Mr. Joaquín Trejo, Financial Planning and Investor Relation Manager; and Carolina Burgos, Senior Investor Relation Analyst. You have received a copy of the company's consolidated second quarter 2024 results. As usual, Patricio will now review our overall performance and then we will move into 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. Securities and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce Mr. Patricio Jottar.

Patricio Jottar, CEO

Thank you, Claudio, and thank you all for joining us today. In the second quarter of 2024, CCU's financial results were much weaker than last year, as they were heavily impacted by two effects: a particularly difficult context for demand in Chile and Argentina, and the depreciation of our main local currencies. In Chile, the industries of our core categories particularly decreased, largely explained by adverse weather conditions with unusually low temperatures and record rainfall during the quarter, particularly in May and June. In Argentina, we faced a sharp contraction in the economy and in the beer industry associated with a challenging consumption context. It's important to mention that we maintained overall market share in both countries. Our main local currencies, the Chilean peso and Argentine peso, depreciated 16.8% and 255.1% against the U.S. dollar, respectively, increasing our U.S. dollar denominated costs and impacting our operating results. Under the original plan HerCCUles, further actions in terms of revenue management and costs control are currently in place. These actions, in a more normalized context of volume growth, should help us return to the profitability path. During the second quarter of 2024, our revenues contracted 8.6%, fully explained by a 12.7% volume drop, partially compensated by a 4.6% higher average price in Chilean pesos. Lower volumes were largely caused by weaker demand in Chile and Argentina, as I explained before. Average prices were higher due to revenue margin initiatives in all operating segments. Gross profit was down 15.8%, and as a percentage of net sales deteriorated by 338 basis points due to higher cost pressures mainly coming from the depreciation of the Chilean peso and Argentine peso mentioned above. MSD&A expenses expanded 1.7%, and as a percentage of net sales deteriorated by 464 basis points mainly due to lower volumes and its negative impact on fixed expense dilution. Overall, EBITDA reached CLP10,053 million, a 78.7% decrease, and EBITDA margin contracted 629 basis points. Net income reached a loss of CLP15,888 million. These figures do not consider the non-recurring gain from the sale of a portion of land in Chile with a favorable effect before taxes of CLP28,669 million and after tax at CLP20,928 million. Including this non-recurring effect, EBITDA totaled CLP38,722 million and net income reached a gain of CLP5,040 million. In the Chile Operating segment, the top line contracted 5.5% driven by an 8.4% volume drop, partially offset by 3.1% growth in average prices. Volume contraction was caused by weaker demand due to unfavorable weather conditions in the quarter, particularly in the beer business. Nonetheless, we saw a much better performance in July, which is a good sign for volumes looking ahead. Average prices were higher driven by revenue management efforts across all our categories, partially offset by negative mixed effects in the portfolio. In this regard, in July, we implemented additional price actions. Gross margin decreased as a result of high cost pressure, largely from our U.S. dollar denominated costs. MSD&A expenses were flooded due to efficiencies that helped to compensate for higher U.S. dollar denominated expenses. Consequently, EBITDA totaled CLP26,587 million, contracting 39.7%. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 22.1% drop as a result of a 27.2% reduction in volumes, partially offset by a 7% rise in average prices in Chilean pesos. Weaker volumes were mostly concentrated in Argentina. On the other hand, Paraguay and Bolivia expanded volumes, while Uruguay dropped due to a high comparison base explained by an uncommon draft in 2023, which boosted packaged water consumption in that year. The improved average price in Chilean pesos was driven by revenue management efforts in all the countries, partly offsetting strong cost pressures mostly coming from the sharp depreciation of the Argentine peso against the U.S. dollar. Consequently, gross margin deteriorated from 46% to 37.5%, and SG&A expenses increased 3.3%, and as a percentage of net sales deteriorated mainly due to the lower business scale in Argentina. Altogether, we reached a loss of CLP24,372 million. The Wine Operating segment continued a recovering trend, with revenues expanding 12% driven by an 11.9% increase in average prices. Volume showed a strong recovery in exports from Chile, which increased by 9.1%, while the Chilean domestic market was down 5.4%. The increased average prices were boosted by the weaker Chilean peso and favorable impacts on export revenues along with revenue management initiatives in our domestic markets. Gross profit rose 28.5%, and gross margin improved by 511 basis points. MSD&A expenses increased 12.4%, mainly due to higher marketing expenses related to exports, which are denominated in U.S. dollars, and as a percentage of net sales remained flat. Overall, EBITDA increased 59.2%. Regarding our main joint ventures and associated business in Colombia, volumes increased in the mid-teens, guiding better financial results. In Argentina, our water business reported a contraction in volumes due to a challenging consumption scenario. Nonetheless, financial results improved versus last year due to efficiencies from a successful go-to-market and back office integration with CCU Argentina. Now, I will be glad to answer any questions you may have.

Operator, Operator

First question comes from Mr. Felipe Ucros from Scotiabank.

Felipe Ucros, Analyst

Good morning Patricio, and thanks for this case. A few questions on my side. Maybe start with the first one on weather. You discussed in your release and your remarks that weather had a little bit to do with the poor volume performance in beer and non-alcoholic beverages. But in my mind, when it's cold and the consumer drinks less beer and non-alcoholic drinks, maybe the consumer drinks more red wine. But the results locally show that in wine, Chile was also negative. So just wondering if you could comment on how those weather effects moved the portfolio and whether we should consider that there's more pressure from generalized consumption rather than weather, or if you think weather was a bigger effect here? And then I'll do a follow-up.

Patricio Jottar, CEO

Look, if we double-click the volumes in the domestic industry, we find differences among the different categories. In fact, while we are keeping market shares in general, across the different categories, the figures of CCU represent figures of the industry. In the case of beer, the whole Chilean segment decreased by 8.4% in volumes, as I mentioned before. But there are differences; in the case of beer, the decrease was in the mid-teens, while in the case of non-alcoholic beverages, the decrease was in the mid-single digits, something like 5%. So, as you could see, there's a very strong difference in both cases, but we are keeping market shares. You are right that when the weather is not good, wine and spirits benefit from this. In fact, the volumes of spirits decreased by around 5%, and the volumes of wine in the domestic market decreased by around 5% as well. May and June were extremely bad in terms of temperature and rainfall. In fact, the temperatures recorded in the second quarter, particularly May and June, were the worst in the last 20 years. This had a strong impact, particularly on beer, which is very sensitive to temperature, and created effects also in other categories, but not as much as in the case of beer. Looking forward, we don't know what is going to happen with the weather, but of course, we assume that it will return to normal, not hot, not cold. July was a very normal month in terms of temperature and rainfall compared to the average of the last 20 years, and we expect volumes to see some growth, not too much, just single digits, around 2% to 3%, which is what is normal in an economy that is not performing well as Chile's economy. So we feel comfortable regarding the future concerning volumes. And again, we think that May and June, particularly in Q2 2024, were extremely extreme due to the conditions I just mentioned.

Felipe Ucros, Analyst

Thanks for the clarity on that. And my second question is on competition. Last quarter, I asked about the rationality in the market and whether your competitors were moving prices with inflation, and it seemed that they were not moving at the same speed or magnitude as CCU. You announced in your release that you increased prices in July. Have you seen your competition follow you this time around?

Patricio Jottar, CEO

Look, Felipe, I think that there is a lot of rationality in our markets and it happens that the pressure on direct costs has been tremendous. I mean, if you take a longer period of time, let's say from 2019 to 2024, our direct costs have increased in beer and non-alcoholic beverages by 66% to 68%, and we have been able to increase prices in line with inflation, a little bit less in the case of beer, a little bit more in the case of non-alcoholic beverages. But we have not been able to catch up with the enormous pressure on direct costs. We need to continue making efforts to improve prices to recuperate margins, and we are moving in that direction, as is the industry as a whole.

Felipe Ucros, Analyst

That's clear. Any indication that your competitors have followed after your increase in July?

Patricio Jottar, CEO

I prefer not to double-click on the extremely short term, but I would like to say that the industry as a whole is facing the same pressures on direct costs and is moving in the direction of recuperating margins. In fact, it's not just in our region; this is happening all over the world. But I prefer not to discuss what is happening today in the market. I remain positive on our ability to recuperate margins.

Felipe Ucros, Analyst

Yes. It’s very short term to kind of gauge that. Last question on Argentina and shifting to other topics. It's been a few quarters since you left the Coke distribution system in Argentina and started using your own. Just wondering if you can give us an idea of how smooth the transition has been and whether you're happy with where you are on that distribution today.

Patricio Jottar, CEO

Look, we are extremely happy. We made all the integration of the distributions in August, September, and October 2023. It was very important for us, because as you probably know, 22% of our beer volumes in Argentina were distributed by the Coca-Cola system, and we wanted to have control over 100% of our distribution. By incorporating the non-water products into our distribution, we created enough critical mass to have our own distribution system across the territory. Today, we do not depend on the distribution of Coca-Cola in the South and in some parts of the North of Argentina. It was a very smooth transition. We reduced a lot of full-time employees and many distributors. This was fully reflected in our P&L for 2023, and the results are extremely good and satisfactory. We're very happy with our ability to run a joint distribution, which today includes beer, wine, cider, and water. Particularly in the case of water, we are running at a positive EBITDA and positive net profit this year. We're not consolidating this yet; we expect to consolidate beginning in August or September 2024. As for the year 2024, in terms of volumes for the categories, in Argentina, it is extremely poor. I mean, the beer category is seeing a 30% decrease in volumes. The water category is experiencing the same trend. We are maintaining roughly speaking our market shares there. But when volume decreases by 30%, everything in terms of results becomes very extreme. We don't know when the consumption patterns in Argentina are going to change. Hopefully, this will happen in Q4 2024, but we truly don't know. In the meantime, we are capturing all the efficiencies of having just one distribution network.

Operator, Operator

Next question is for Mr. Pedro Seixas from Neuberger Berman. We'll come back to Mr. Pedro Seixas in a moment. In the meantime, we'll take Mr. Alvaro Garcia from BTG Pactual.

Alvaro Garcia, Analyst

A question on Colombia; the volumes there were quite strong relative to how the economy is doing. I was wondering if you can comment on initiatives in Colombia for that JV. And then just to follow-up on Argentina, you mentioned share was stable. I was wondering if you could clarify if that was volume share or value share. My sense is if you manage to lag on pricing now and gain volume share, you could be in a much better position coming out of the crisis. But any clarity there would be very helpful.

Patricio Jottar, CEO

Regarding Colombia, yes, it's true. We are growing our volume by 50%. We're gaining a little bit of market share. I mean, we made public the results in terms of head profit, but EBITDA has been positive year-to-date, and we expect to see much better results in the last part of the year, as most of the volume comes in October, November, and December. It has been tough, but our project in Colombia is moving in the right direction, and we're very happy about it. Regarding Argentina, yes our volumes and market share in terms of volumes are in the same direction as our value share. Looking back at 2023, our prices increased by 11% more than inflation, which is around 10% or 11%. With inflation at 200%, it's very difficult to know exactly how to compare our prices with inflation. But let's say we gained a slight advantage over inflation. In 2024, we are losing 6 or 7 points compared to inflation. So if you take both 2023 and 2024 together, we are about 3 points above inflation. The industry as a whole is moving in the same direction, but it's not a good idea to decrease prices in order not to lose volumes. If you do this, it will be extremely difficult to recuperate prices in the future. I prefer to increase prices in line with inflation and do our best efforts to keep our scale and trust that the economy will return to normal and grow sooner rather than later, but it's really very difficult to ascertain when that will happen.

Operator, Operator

We'll go to Mr. Pedro Seixas, Neuberger Berman. He typed this question: I was wondering if you could elaborate on how much exactly the FX fluctuation affected the 78% drop in EBITDA. How much of that 78% was due to the FX depreciation, and how much was due to the volume decline?

Patricio Jottar, CEO

We have the precise calculation. I will ask Felipe to provide the correct figures, Pedro.

Felipe Dubernet, CFO

Thank you, Pedro, for your question. At the consolidated level, our EBITDA reduced from CLP47 billion last year in the second quarter to CLP10 billion in the second quarter of this year. So, the difference is CLP37 billion. Of this, the external effect, as we call it, which is the combination of exchange rates in Chile, primarily the depreciation of the Chilean peso against the U.S. dollar, impacted us negatively by about CLP16 billion. This was a significant hit to our results in Q2. While the exchange rate somewhat compensated with better prices in PET, aluminum, and malt costs, all operating variables such as price were positive but not enough to compensate for the input costs. Overall, we reduced volume by 13% at the consolidated level, and despite some efficiencies, especially in logistics, the overall impact was around CLP21 billion negative. Thus, the main causes of the EBITDA decline were first external effects, which amounted to about CLP16 billion, and the volume offset, which was somewhat compensated by price and efficiencies resulting in a negative of about CLP21 billion.

Operator, Operator

We’ll now take questions from Nicolas Donoso. We’ve noticed your question from your line, so you can go ahead. Your line is open.

Fernando Olvera, Analyst

My question is related to cost. If you can share, what is your outlook for the remaining of the year? Given that packaging and sugar costs are down, although the Chilean peso has depreciated against the U.S. dollar. And I have another question but I will wait.

Patricio Jottar, CEO

We'll also ask Felipe to discuss the cost of raw materials and what we expect for the remainder of the year.

Felipe Dubernet, CFO

In terms of raw materials, regarding water, you are right. Sugar has softened a little bit, but it is still higher than last year. So, we continue to see higher costs there, but we anticipate a better outlook in the future soon. The downside we have in raw materials is that orange juices are at record-high costs, especially due to Brazil. The rest shows the same trend, and I think they will stabilize. However, it’s very difficult to provide an outlook because I don't know; in the last two months, the Chilean peso moved from high 900s—let's say close to 1,000—to below 900 this week, which has been particularly volatile in line with overall markets. It's challenging to predict. I prefer not to provide an outlook. We used 940 in our projections, but if you go into Bloomberg, you'll find a full array of projections. Also, it’s important to remember that our costs are very sensitive to copper prices. So, besides how the financial markets move or how Fed rates will move going forward, capital prices play a role, making prediction quite difficult. This is why we took actions in terms of pricing because all the market players are facing the same input cost pressures, and we think that this trend will continue towards the end of the year. Thus, it's important to work on revenue management and pricing.

Fernando Olvera, Analyst

You highlighted in the press release that recovering profitability is your short-term priority. So can you share what additional measures you have already implemented or are about to implement to recover margins? And how do you envision this recovery on margins?

Patricio Jottar, CEO

Indeed, it's our short-term priority. In the long term, you need to focus on three pillars to effectively manage a good business: profitability, growth, and sustainability. Of course, we emphasize these three pillars. As for the priority for the next six months, it is profitability, and we are putting all our efforts into this. Cost reduction is number one. We have our HerCCUles plan devoted to becoming much more efficient on one hand, with revenue management initiatives on the other, controlling full-time employees, and implementing efficiencies regarding full-time employees, SKUs, and some digital transformation programs, especially in terms of how we sell and distribute. If you'd like more details on this, I can certainly elaborate, but those are our main elements. We are fully focused on recovery. This is our top priority for now and was our top priority yesterday as well. We expect to improve our financial results in the second half of the year; this is important. This is our number one priority.

Operator, Operator

Our next question comes from Ms. Constanza Gonzalez from Quest Capital.

Constanza Gonzalez, Analyst

I have a question regarding Argentina. Could you clarify about what you are expecting in terms of volumes and prices in the next quarter, or if you expect some recovery at the end of this year or the beginning of 2025?

Patricio Jottar, CEO

Thank you, Constanza. It is extremely difficult to know exactly. If our volumes were handed before the beginning of the crisis, and today, at 70, we expect to keep at the level of 70 during Q3, and we expect to start at the level of 85 in Q4. But this is just an expectation because we really don't know. If we're able to establish 85, we could achieve profitability by the end of the year. But again, this is our expectation; we don’t know for sure. Regarding pricing, as I mentioned before, we expect to move in line with inflation.

Operator, Operator

Next question comes from Ms. indiscernible from Compass Group.

Unidentified Analyst, Analyst

My question is if you have another nonrecurring asset that can be put on sale as the land that we saw this quarter.

Patricio Jottar, CEO

No, we expect not to have something like this in the second half of the year.

Operator, Operator

The next question comes from Lucas from JPMorgan.

Lucas Ferreira, Analyst

I hope you hear me well. My first question is—yes, so my first question is in light of this very uncertain scenario for commodities. Do you think the company would reconsider its policy not to hedge commodities and FX? How do you see the benefits of the cost of hedges versus having a bit more predictability on these lines? That’s the first question. The second question is just to clarify that, in the third quarter, the company is seeing improvement in volumes. Can you provide more information on how the premium segments performed during this bad weather situation in the second quarter? Furthermore, do you see the premium segment accelerating more now in the third quarter compared to the whole industry? In other words, on top of the price increases you're implementing, do you believe that the mix should also be helpful to improve your average price?

Patricio Jottar, CEO

Thank you, Lucas, for your question. Look, regarding hedging, we have a very clear policy, and we do not hedge raw materials. I mean because if you choose to hedge, you would face the cost of intermediaries and lose money regardless. If you ask me if it is a good idea to hedge when it's beneficial and not hedge when it's not, I think if I could predict the right timing, indeed, I would. But we lack that visibility. So we are clear: we do not hedge, and we will not hedge. Regarding the premium segment, it's quite interesting because in the beer category in Chile, for example, premium constituted 25% to 27% of our volumes before the pandemic in 2019. After the pandemic, premium rose to around 50%. In the best moment, it was around 60% in 2021. Now, as described, with the withdrawals from pension funds, the premium shares returned to around 50%. We reduced the percentage of premium from 53% to around 50%, 49%, and we expect it to stabilize at that level. We believe that no major changes will occur for the rest of the year.

Operator, Operator

We have a question from Nicol Helm from MetLife Investment Management. Okay. We'll come back later. Next question is a follow-up from Alvaro Garcia from BTG Pactual.

Alvaro Garcia, Analyst

Sorry about that. I meant to ask about COGS and the Chile volumes, but both of those questions have been answered.

Operator, Operator

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

Patricio Jottar, CEO

Thank you very much. To conclude, I would like to reiterate that our second quarter of 2024 results were very weak and were negatively impacted by a particularly difficult context for demand in Chile and Argentina and the depreciation of our main local currencies, which resulted in higher cost pressures. Given this scenario, we are confident that our multi-category beverage strategy focused on synergies should help us return to the profitability path, which is our short-term priority going forward, as I mentioned during the conference call. Thank you very much for attending.

Operator, Operator

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