Earnings Call Transcript - CCU Q2 2023

Operator, Operator

Good day, everyone. And welcome to CCU's Second Quarter 2023 Earnings Conference Call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir.

Claudio Las Heras, Head of Investor Relations

Thank you. Welcome, everyone. And thank you for attending CCU's second quarter 2023 conference call. Today with me are Felipe Dubernet, Chief Financial Officer; and Colin Drako, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated second quarter 2023 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. Statements made in this call that relate to CCU's previous 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. Felipe Dubernet.

Felipe Dubernet, Chief Financial Officer

Thank you, Claudio, and thank you all for joining us today. During the second quarter 2023, CCU posted a strong set of results in the past economic environment, expanding consolidated volumes by 4.8% and EBITDA by 45.1% from last year. The growth in volumes and EBITDA was 6% and 96.2%, respectively, when we exclude the Wine Operating segment, which is facing a particularly challenging scenario due to a sharp decrease in export volumes, in line with the Chilean wine industry. The performance of the quarter shows that our efforts and initiatives to recover our profitability strained under the original plan HerCCUles 2023 are on the right path. However, we are aware that more efforts are needed in order to consolidate this positive trend. Accordingly, looking ahead, we will continue focusing on the six pillars of HerCCUles 2023: number one, maintain business scale; number two, strengthen revenue management efforts; number three, enhance the CCU transformation program to deliver efficiency gains; number four, optimize CapEx and working capital; and number five, focus on core brands and high-volume margins and innovations; and six, continue investing in our brand. In quarter two, 2023, our revenues expanded 2.8%, boosted by a 4.8% rise in volumes, while average prices in Chilean pesos contracted 1.9%. The expansion in volumes in the quarter allowed us to be on track to maintain business scale in 2023, in line with pillar number one of HerCCUles. The lower average prices in Chilean pesos were largely explained by the negative translation effect in Argentina, although in local currency evolved in line with inflation. In the key operating segment, average price grew high-single digits during the quarter, despite negative mix effect. Gross profit jumped by 10.7% and gross margin improved from 40.3% to 43.4%, the latter driven by the higher revenues, but also associated with more favorable costs in relevant packaging materials and the appreciation of the Chilean peso versus the U.S. dollar, positively impacting our U.S. dollar-denominated costs in line with pillar number two of HerCCUles. SG&A expenses increased 3.6% versus last year, and as a percentage of net sales were practically flat due to efficiencies across all our operating segments, in line with pillar three of HerCCUles. In total, EBITDA was up by 45.1% and net income totaled a loss of CLP3,943 million versus a negative result of CLP1,455 million last year. Additionally, in quarter two, 2023, we continued delivering strong cash generation compared to 2022. Thus, as of June 2023, net cash inflow from operating activities expanded, and net cash outflow from investing activities decreased during the same period, in line with pillar number four of HerCCUles. In addition, we reduced our portfolio complexity and recorded strong brand preference indicators being key to gain or maintain market share in our main categories, in line with pillar number five and number six of HerCCUles. In summary, consolidated volumes increased 4.8%, driven by a 4.7% expansion in the key operating segment and an 8.1% growth in the International business operating segment, partially compensated by a 14.4% contraction in the Wine Operating segment. Net sales were up 2.8%, and gross profit increased 10.7%. Consolidated EBITDA reached CLP47,126 million, a 45.1% increase. EBITDA variation in the operating segments was as follows: an 86% jump in our Chile core operating segment, a 74.9% expansion in the international business operating segment, and a contraction of 44.5% in the Wine Operating segment. Finally, as I said, we have seen an increase in our results at the net income level. Now I will be glad to answer any questions you may have.

Operator, Operator

Thank you very much for the presentation. We'll now move to the Q&A portion of the call. We'll take the first question from Felipe Ucros from Scotiabank. Please go ahead.

Felipe Ucros, Analyst

Thanks, operator. And good afternoon, Felipe, Claudio. Congrats on the results, really nicely done from a year ago. I wanted to ask questions about the changes that you think will be implemented with distribution in Argentina. And how you see that a piece of the portfolio might be leaving from the core system. Just wondering if you could give us any details around that, hopefully something like which brands you're planning to remove or what percentage of volumes you're trying to move out of the system? And also, I wanted to know what's the plan once you're out of the system. Is it going to be to create your own distribution network, or will you find another third party that you think would better gap in Coke? Any details you can give us around it would be great.

Felipe Dubernet, Chief Financial Officer

Thank you, Felipe, for your question regarding our distribution and the changes we are implementing in our distribution in Argentina. Before that, let me give you some background. We need to have our own distribution in the vast majority of the country. Last year, we had the two Coca-Cola bottlers, Arca and Andina, distributing in particular areas or geographies such as the North Arca and South, plus other regions of the Coca-Cola system, that accounted for more or less 20% of our total volumes. But as we stated in our press release, the distribution agreement that we had in some regions with the two Coca-Cola bottlers that I just mentioned expired in June. So in those regions, we have implemented a new distribution network that is a joint distribution of beer with our recently acquired water business or the participation we have in the joint venture with Danone in Argentina. Thus, in all of the countries, this network is now implemented, combining beer, wine, liquors, and also the water business. As we mentioned, at the same time, we have negotiated a potential new distribution agreement with Coca-Cola bottlers, which could include some of the brands in our portfolio. Some brands from our portfolio could go with the distribution with the Coca-Cola bottlers. But so far, we are still negotiating this potential agreement with them. In summary, the new distribution level has been successfully implemented now in Argentina, and we have also integrated the water business into our systems at a key level in Argentina, with very successful implementation.

Felipe Ucros, Analyst

No, that's very clear, Felipe. So that means that we do negotiate the distribution with Coca-Cola, and you're already distributing with your own system. Is that correct?

Felipe Dubernet, Chief Financial Officer

Yes, we are distributing now with our own system. And I want to be clear, Coca-Cola only distributes in particular areas. This agreement finished at the end of June. But we have negotiated that we could distribute some of our brand portfolio, potentially under a new agreement.

Felipe Ucros, Analyst

Okay. That's very clear. And then the second question I wanted to ask you is about how you feel the temperature of the Chilean consumer. What's the sentiment for business on the ground in Chile?

Felipe Dubernet, Chief Financial Officer

Yes. We had a good expansion in volumes in Chile during quarter two, as you know, this was a 4.7% growth. Having said that, this is still above pre-pandemic figures. So it's good growth. However, the comparison for quarter two was easier than the comparison for quarter one of last year because, as you know, we had the influence of government aid plus the withdrawal of pension funds in Chile, which boosted consumption. So I would say we are happy with the evolution of the industry in order to maintain our business scale. However, we are very clear that the economy has been deteriorating, therefore, consumption seems to be easing, especially in the last four quarters, I would say. But from quarter two, we see growth in our categories and more resilience against the reduction in consumer purchasing power. So in summary, regarding the evolution of the consumer sentiment, we are confident that we will be able to maintain our business scale in the following quarters.

Felipe Ucros, Analyst

Very clear. And just a follow-up on the Chile question. Is the premium segment of the portfolio now stabilized?

Felipe Dubernet, Chief Financial Officer

Yes. What I would say, and actually, as we stated during our release, a portion of our revenue management efforts were offset by the mix of our portfolio. So we reached, as you know, records in terms of premium mix, especially in the beer category, but also in wine, and liquors during the end of 2021 and the beginning of 2022. I would say it has stabilized in quarter two compared to last year where, in fact, it's growing more in the main three brands, especially in beer, but also in wine.

Felipe Ucros, Analyst

That's all very clear. Thanks a lot for the comments.

Felipe Dubernet, Chief Financial Officer

Thank you, Felipe. Have a wonderful day.

Operator, Operator

Thank you very much for the question. Our next question comes from Fernando Olvera from Bank of America. Please go ahead, sir.

Fernando Olvera, Analyst

Great. Thank you. Good afternoon, everyone. Thanks for taking my questions. Just to follow up, Felipe, regarding Chile, sorry. At the beer segment, I mean, can you comment on how your market share behaved during the quarter? And my second question is regarding the International business; can you comment on the main drivers of volume growth and your outlook for the second half of the year? Thank you.

Felipe Dubernet, Chief Financial Officer

Yes. Regarding the beer segment, I would say we have maintained a steady market share. We gained one point one month and then reduced by half a point later on. So we're taking market share over the last, I would say, six quarters this year. Regarding the question on International business, the comparisons last year were low, especially in Argentina. In fact, volumes have been challenged in recent quarters due to the high level of inflation affecting consumer purchasing power. We are in Uruguay particularly facing a worse situation tied to drought conditions during the summer, causing scarcity of public water. However, this situation boosted our water sales in Uruguay during quarter two, along with a very good performance in Paraguay, which saw high-single digit growth in volumes. The results from Paraguay are encouraging. In the case of Bolivia, we experienced depressed volumes. So going forward, as you know, the international segment has a significant participation from Argentina, but we believe Argentina still has a negative trend in terms of volume. We could see a decrease quarter-on-quarter in the next period.

Fernando Olvera, Analyst

Great. Thank you, Felipe.

Operator, Operator

Thank you very much. Our next question comes from Mr. Henrique Brustolin from BTG Pactual. Please go ahead, sir. Your line is open.

Henrique Brustolin, Analyst

Hi, hello, Felipe. Thanks for taking my question. I would like to explore a little bit more the recovery in profitability in Chile going forward to historical levels. If you could break it down from two perspectives: the first one coming from costs, how should we think about costs in the second half of the year compared to what you delivered in the first half? Especially now that we see maybe a slightly weaker Chilean peso and overall stable commodity prices? And the second one on the pricing front: as you mentioned, pricing has been very strong over the past two years, even with some negative mix impact. But we see the results in your net revenues per hectoliter. The industry performance, even though it's not growing as much, volumes remain strong relative to pre-pandemic. So the question, I think, is how much room do you see for additional price hikes in the second half of the year that could help bring margins back to pre-pandemic levels? Those are the two questions. Thank you.

Felipe Dubernet, Chief Financial Officer

Thank you, Henrique. Yes, so far, I think these are the first steps in order to recover our pre-pandemic margins as we pointed out. We have had a massive increase in raw materials compared to pre-pandemic levels. Let me give you just one example: Aluminum prices in 2019 were $1,800 per ton and now have stabilized at $2,400 a ton. So that represents a significant increase of between 25% to 30%. We had very high aluminum prices right after the Russian invasion of Ukraine when they jumped to $1,300 per ton. Now they have stabilized at a lower level but are still much higher than the levels we saw previously. This is a long path because, as we said, in this kind of business, you need to record the margin, and we have been doing that, especially in quarter four of last year, quarter one, and now quarter two. As we pointed out, with the differences in interest rates between the Fed and the Chilean Central Bank, we have observed an increase in the exchange rate and the devaluation of the Chilean peso. This impacts our costs. If this trend continues, I think it should be taken into account in our pricing strategy. However, I would say it depends on competition and many factors in the upcoming months. So I don't want to make any firm predictions about that. On the cost perspective, I think raw materials are more or less stable, but we face high cost pressure in sugar due to global supply and demand conditions, particularly in India. The good news is that I believe I mentioned in previous calls that we have high levels of inventory. Our cash generation has normalized, and we have been reducing our raw materials inventory to average levels that we had before the Russian invasion, which should help with our costs. But to be honest, we are always facing unstable volatility in exchange rates, and our goal is to gradually recover our pre-pandemic margins.

Henrique Brustolin, Analyst

That's clear. Thanks, Felipe.

Operator, Operator

Thank you very much. Our next question is from Martin Leche from Fundamenta Capital. Should we expect the cost per liter in Chile to decrease year-over-year due to high commodity comparables and improved foreign exchange rates? Or should we anticipate it to increase, but at a rate lower than inflation? Thank you.

Felipe Dubernet, Chief Financial Officer

Thank you, Martin. Yes, we should expect costs per liter in Chile to be negative year-over-year, given high comparisons, especially in the third quarter last year, when we tactically experienced CLP1,000 for every dollar exchange rate. Now it's stabilized, maintaining around CLP850 in the last two weeks. So we see some benefits from that. As I mentioned in the previous question, we are experiencing cost pressure in sugar prices compared to last year, but to answer your question, it should be negative, particularly in quarter three.

Operator, Operator

Thank you very much. It looks like we have no further questions at this point. I will pass the line to the CCU team for the concluding remarks.

Felipe Dubernet, Chief Financial Officer

During quarter two, 2023, we consolidated a recovery path in our financial results in a tough economic environment. The latter was mainly driven by the implementation of our strategy in April 2023. Although we are aware that more efforts are needed to keep improving profitability. In order to succeed during the second semester ahead, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you all a wonderful afternoon.

Operator, Operator

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