Earnings Call Transcript - CCU Q1 2023

Operator, Operator

Thank you for attending CCU's First Quarter 2023 Conference Call. Today with me are Felipe Dubernet, Chief Financial Officer; and Carlos Anwandter, Financial Planning and Investor Relations Manager. You have received a copy of the Company's consolidated first quarter 2023 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. Before we begin, as usual, 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 Felipe Dubernet.

Felipe Dubernet, CFO

Thank you, Carlos, Claudio, and thank you all for joining us today. During the first quarter of 2023, CCU posted a recovery in financial results with stable EBITDA from the previous year in a tough economic environment. This better performance was mostly driven by our main operating segments in Chile. As a consequence of the implementation of our recovery profitability plan, HerCCUles 2023, the upward trend in results during the last quarter showed us that we are on the right path. Nonetheless, we are aware that the results of the first quarter of this year are only the beginning, and to consolidate this trend we will continue focusing on the six pillars of HerCCUles 2023, which are: first, maintain business scale; second, strengthen revenue management efforts; third, enhance the CCU Transformation program to deliver efficiency gains; fourth, optimize CapEx and working capital; fifth, focus on core brands and high volume, margin innovations; and sixth, continue investing in our brand equity. Before describing the performance of the quarter, it is important to mention that results from the first quarter of 2022 were still highly influenced by a particularly positive scenario for consumption in Chile, as consolidated volumes during that quarter were up 7.1% versus the first quarter of 2021. After that, volumes contracted, compared with the same quarter of the previous year by 2.9%, 2.8% and 5.5% in the second, third, and fourth quarter of 2022, respectively. Therefore, in spite of decreasing volumes in the first quarter of 2023, we are still on track to maintain business scale in 2023, in line with pillar number one of our regional plan, HerCCUles. During the first quarter of 2023, our revenues expanded 4.5%, boosted by an 8.1% growth in average prices in Chilean pesos, partially offset by a low single-digit drop in volumes. The lower volumes were caused by contractions in all the operating segments, mostly due to high competition, especially in Chile, a weaker consumption environment in Argentina, and a lower line of exports. The better average prices in Chilean pesos were mainly explained by the revenue management initiatives in all our main geographies and categories despite negative mix effects, in line with pillar number two of our regional plan HerCCUles. Accordingly, gross profit jumped by 9.6% and gross margin rose by 227 basis points. The latter was also associated with lower cost pressures as a consequence of more favorable costs in some key packaging materials. MSD&A expenses as a percentage of net sales deteriorated by 317 basis points, many of the consequences of the low base of marketing expenses in the last year’s first quarter due to phasing and higher distribution expenses. This was partially compensated with efficiencies across all our operating segments, which will be more reflected during the rest of the year in line with our third pillar of HerCCUles. In all, EBITDA reached a 0.2% increase and EBITDA margin contracted by 80 basis points. The slight expansion in EBITDA is surely a good start to recover our financial results, although more efforts are needed to consolidate the profitability improvement in an inflationary scenario. Regarding net income itself, it increased by 9.6% associated with a lower non-operating result, mostly due to higher financial costs and a higher loss in equity in terms of joint ventures and associates. Additionally, in the first quarter of 2023, we delivered stronger cash generation. Net cash inflow from operating activities expanded versus last year, while net cash outflow from investing activities was stable versus last year. This is in line with our fourth pillar of HerCCUles. Furthermore, we reduced our portfolio complexity while brand equity remains at high levels, especially in our core brands, and continues to be key to maintaining market share in our main categories. This fulfilled our pillar number five of HerCCUles. In the key operating segments, our results marked positive turning points after four consecutive quarters of contractions in EBITDA. Top line expanded 6.4% driven by 7.6% growth in average prices, while volumes dropped by 1.1%. Prices were higher due to revenue management inputs across all our categories, partially offset by negative mix effects in the portfolio. Volumes were seen through the quarter, although decreased, mainly associated with a tough comparison base. Gross profit expanded by 14.9%, and gross margin improved by 350 basis points, also as a result of lower cost pressures and efficiencies in manufacturing costs. MSD&A expenses as a percentage of net sales deteriorated by 357 basis points, mainly explained by a lower comparison base in marketing expenses in the last year's first quarter due to phasing, and higher distribution expenses. Consequently, EBITDA increased by 6.8% and EBITDA margin was stable. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 4.7% rise as a result of a 13.9% increase in average prices in Chilean pesos, partially offset by an 8.1% contraction in volumes. Industry volumes were weaker in all the geographies, but mainly in Argentina as a consequence of a difficult economic context. The better average prices in Chilean pesos were explained by price increases in line with inflation in Argentina and revenue management initiatives in all the other geographies. Consequently, gross profit expanded by 9.3% and gross margin grew from 52.9% to 55.3%. MSD&A expenses as a percentage of net sales deteriorated by 161 basis points due to a lower scale in Argentina. Altogether, EBITDA expanded by 7.9% and EBITDA margin improved by 53 basis points. The Wine operating segment faced a particularly challenging scenario during the quarter. Revenues were down by 17.7%, fully explained by weaker volumes. Average prices were flat, as revenue management efforts in domestic markets were offset by negative mix effects in export volumes. The lower volume was mostly attributable to exports, which contracted in the low-20s, associated with inventory adjustments from our clients and distributors. On the other side, domestic volumes in Chile dropped by mid-single digits. As a result of all the above, gross profit deteriorated by 32.5% and gross margin contracted by 699 basis points. MSD&A expenses dropped by 1.9%, although as a percentage of net sales deteriorated by 508 basis points, due to the lower revenues. In all, EBITDA reached CLP3,496 million, a 69.5% fall. Regarding our main JVs and associated businesses, in Colombia, we started 2023 with a low single-digit decrease in volumes, while in Argentina, our water business with Danone showed a low-teens expansion in volumes. Both businesses are relevant for our regional multi-category beverage strategy, being committed to continue gaining profitability in the future. Now, I will be glad to answer any questions you may have.

Operator, Operator

Thank you for the presentation. We will now move to the Q&A portion of the call. Our first question comes from JPMorgan. Please go ahead, your line is open.

Unidentified Analyst, Analyst

Thanks so much. Hi, Felipe, Carlos, Claudio thanks so much for the specific question. So I had two quick questions here. So first, if you could maybe walk us through a little bit if there's any need for additional price increases, mainly in Chilean operations, see how that dynamic is going a little bit understand how the consumer in the market is reacting to those increases that you have been rolling on for some quarters now? And the second one, maybe if you can walk us through a little bit on the plan that you have for the wine business, obviously was a challenging quarter, but any short-term actions that you have mapped out there to kind of have some relief there on the pressure that we saw during the work? Thank you so much.

Felipe Dubernet, CFO

Thank you for your question. Regarding pricing, this was a challenging area and aligns with our HerCCUles initiative to improve our revenue management. As mentioned in previous calls, we aimed to ensure strong pricing for 2023 to offset cost inflation in our profit and loss statement. In the third quarter, pricing trends followed the industry, and we implemented an additional price increase for both beer and non-alcoholic beverages in April. The consumer response has shown a slight overall volume decline of 1.1%. However, we believe the consumer is quite resilient despite the price increases, particularly considering the high comparisons from last year's first quarter when volumes surged in Chile. This is just the first quarter of the year, and we'll need to observe how things evolve from here. As for the wine business, we need to strengthen our HerCCUles strategy in that sector. Our export volumes have indeed declined by over 20%, primarily due to clients and distributors in the northern hemisphere reducing their inventories. To address this, we must boost our commercial efforts in key markets such as England, the U.S., and especially China. Additionally, we need to work on improving our product mix, which has worsened in the first quarter. Enhancing execution will be essential. We are facing a challenging global environment not only because of inventory reductions but also due to a decrease in global wine consumption. We aim to offset this with improved efficiencies in our bottom line, in line with our other units at CCU, particularly in wine. This summarizes our situation as we navigate a complex scenario in the global wine industry.

Operator, Operator

Our next question comes from Mr. Henrique Brustolin from BTG. Please go ahead. Sir, your line is open.

Henrique Brustolin, Analyst

The first one, in Chile, if you could comment a little bit, we saw this very good improvement in terms of your unitary clause in the division. So if you could comment a little bit, how much of these lower commodity prices are already reflected in these Q1 results or how much more you might still benefit from the current cost structure? That's the first one. And the second one also in Chile, you mentioned the negative mix effect. If you could just give more details in terms of if you mean by that the performance of beer versus non-alcoholic beverages, and within beer, if you could comment a little bit on how was the product mix, when it comes to the performance of premium brands versus mainstream core brands?

Felipe Dubernet, CFO

Certainly, we are with good headwinds in terms of cost pressures, especially when we come from very tough comparisons in quarter three and quarter four of last year. But on a quarter-to-quarter basis, the exchange rate is flat, so still we are not benefiting, I would say, comparing quarter-to-quarter with the exchange rate. Certainly there are certain commodities that dropped in price, especially in packaging materials like aluminum. This is helping mainly aluminum. However, we have bad news regarding our other key raw materials, such as sugar; as you may know, India suffered a very poor harvest in terms of sugar, which is a high-consuming commodity globally. Sugar prices are currently traded at more than 200 extra U.S. dollars, from 500 last year to $700 or $600 in international markets. So, we have on the one side maybe in the future if the macroeconomic conditions are maintained, especially the exchange rate, we will certainly have better costs. Also, it's good to remind that in some key raw materials, we took a decision to increase inventory, such as PET, but this inventory is being depleted. We expect especially that in polyethylene, we can benefit from slightly better prices in the second semester. Regarding your question on mix, yes, I made the commentary that we saw the volumes in the Chile operating segments reduced by 1.1%. I would say we have good momentum in beer, where volumes were low single-digit and generally flat. We had some outbreaks of heat in Chile during February and very unfortunate situations. This high temperature in March, certainly affected the non-alcoholic business to be flat in terms of volumes. And within beer, the mix of beer shows that premium brands have a lower percentage within the whole mix compared to the mainstream brands. This is what we call an overall mix effect in performance. Despite that, net prices increased approximately 8% during the quarter.

Operator, Operator

Next question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.

Felipe Ucros, Analyst

Both of my questions were asked, so let me do follow-ups on them. So the first one on the message and he could just ask. So you discussed beer versus non-alcoholic beverages and you discussed the mix. Just wondering if you can address packaging mix and channel mix, how those have evolved. And then my other follow-up would be on the wine question that was asked earlier on. So what's happening is clearly global and industry-wise, we're seeing a reduction of inventories everywhere, not just Chilean peers that we're seeing it with U.S. peers as well. Just wondering what your view is on the direct question of that inventory correction: do you think most of it has already happened and we're sort of done? And also I wanted to ask if you've seen that correction in inventories to be more pronounced in certain regions? Not sure if maybe China's picking up or other regions are reducing their inventories? Just wondering if there's a difference across regions? Thank you.

Felipe Dubernet, CFO

Let me start by the last question regarding the wine. Inventory reduction is all across the board, because with high interest rates globally and also because we came from very high levels of inventory due to the pandemic, clients and routes increased their inventory policies, which shorted patch we had in freight. Therefore, this reduction of inventory has two main drivers: one is higher interest rates, and the second is because they had massive increases in inventory in the past, impacting logistics. It's difficult to know how much inventory we have, but we are aware that the global wine consumption is on a downward trend. Thus, this reduction in inventory will need to be closely monitored in the upcoming months. Regarding the mix, I think the mix affecting beer is mostly contributing to lower premium brand sales. However, it is good to remind that we came from very high premium mix levels in the past. Certainly, the consumer has less money available, making them shift from premium brands to mainstream brands. Before the pandemic, the premium mix stood at a high of around 30-40%, capping it at above 50%. Now it has moved to 40%. So we still have higher premium mix brands compared to pre-pandemic levels. Regarding the movement of channels, it occasionally shifts, but it remains stable overall.

Felipe Ucros, Analyst

That's very clear. That's the only conceptual answer to that. Maybe if I can ask just one follow-up on the underlying issue: would you say that the sell-out is as solid as it has been? I mean, clearly the weakness is on the selling, but how's the sell-out performing?

Felipe Dubernet, CFO

Yes, the sell-out is not performing badly, let's say. So as of today, it is mainly related to inventory reduction. However, in the first part of the quarter, sell-out was solid but in the last month, it reduced its momentum.

Operator, Operator

Thank you very much for the question. We're going to read out a couple of text questions at this point. The first text question is from Vidhi Vira from Goldman Sachs. Congratulations on the results. How was the demand and pricing in Chile shaping up this quarter?

Vidhi Vira, Analyst

As we said, we have increased prices, especially last quarter of last year. We entered with better prices this quarter. And the demand, more or less, or the scale of the business in Chile was maintained, reducing the volumes by 1.1% with a very high comparison base because I would remind you that last year’s volumes in the first quarter grew 7.1% overall for the entire business. So that... but then in quarters two and three, we start a reduction in terms of volumes. So given the price increase, I would say that the volumes are resilient. Of course, we will not see growth as we did in 2021 when we had the pension funds withdrawal in Chile, which boosted consumption.

Operator, Operator

The next question comes from Mr. Rodrigo Godoy from Creditcorp. Your line is open.

Rodrigo Godoy, Analyst

Yes, it's regarding the wine segment. Can you ensure the same trend in quarter two in terms of volumes as we had in quarter one? I think we still had a negative volume in April. However, just in May it improves because of the destocking of clients is finishing. But it would be very difficult to compensate throughout the year the inventory reduction that impacted volume here in the first quarter. And then, the other question is about the Chilean operating segment. Could you give some color on the recent trend in volumes in quarter two of 2023? A, still we are in the middle of the quarter. It would increase prices in both non-alcoholic and beer business. So, we had a boost in volumes in April, but we think it will stabilize in May and June. Certainly, we don't know for overloading but still, 50% of the quarter is not completed. But we expect that we will grow volumes because quarter two of last year was the worst quarter in terms of competition.

Operator, Operator

Next question we have is from Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.

Fernando Olvera, Analyst

I have two questions. The first one is regarding Chile. How are you thinking about marketing expenses for the remaining of the year given a more modest demand versus last year? And when do you expect the low base comparison to finish? And I'll wait for the second question.

Felipe Dubernet, CFO

It's a very specific question. So let me first emphasize that according to pillar six of HerCCUles we will enhance and protect our brand equity. So, every efficiency we achieve in the organization will not mean a decrease in marketing expenses. We will continue investing behind our brand. Regarding the comparison that was particularly low in the first quarter of last year, marketing sessions are in the normal case now. But let me emphasize that we'll continue investing, aligned with our pillar number six of HerCCUles behind the brand. I think you have a second question, right?

Fernando Olvera, Analyst

My second question is related to the international business. Can you comment on the performance between premium and non-premium beer brands and how do you expect volume to behave for the remainder of the year? Thank you.

Felipe Dubernet, CFO

I think the situation with the international business is a little bit different than in Chile. Particularly, there are two markets where volumes are suffering, especially Argentina due to high inflation, meaning that the consumer has less money available. Bolivia also is suffering due to an industry reduction. Other markets are more healthy, but Paraguay was affected by tropical disease during the first quarter. So, we hope to be in better shape in the upcoming quarter, but the volume reductions are mainly in Argentina and Bolivia.

Fernando Olvera, Analyst

And what is your expectation? I mean, in terms of volume going forward after the decline we saw in this first quarter?

Felipe Dubernet, CFO

In international business, you mean?

Fernando Olvera, Analyst

Yes, the international business. Thank you.

Felipe Dubernet, CFO

Yes, I would say Argentina still has the same fundamentals regarding high inflation and potential devaluation. So, I think we will not see a recovery in terms of volume in Argentina while pricing would be in line with inflation.

Operator, Operator

Thank you very much. We see no further questions. At this point, I'll pass the line back to the management team for any concluding remarks.

Felipe Dubernet, CFO

Thank you all for attending today. In the first quarter of 2023, we delivered a recovery in our financial results in a tough economic environment. The latter was mainly driven by the implementation of HerCCUles 2023. For the rest of the year, we will continue executing this plan. These are the first steps to deliver profitable and sustainable growth in this volatile country. Thank you and have a wonderful day.

Operator, Operator

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