Earnings Call Transcript
United Breweries Co Inc (CCU)
Earnings Call Transcript - CCU Q2 2022
Operator, Operator
Before we begin, please take note of the cautionary statement. Statements made in this call related 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 additional information about risk and uncertainty set forth in CCU's annual report in the form of 20-F filed with the US 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. We are facing a challenging and volatile macroeconomic scenario. In this context, we need to focus on maintaining business scales and recover our margins. On the positive side in terms of business scale, despite a decline in our consolidated volumes in the second quarter, considering a high comparison versus 2021, we reported double-digit growth when compared with pre-pandemic volumes, this is the second quarter of 2019. That's our business scale; scale remains strong through a constant improvement in brand equity and excellence in execution. On the negative side, regarding margins, these were negatively impacted by strong external effects coming from higher prices in commodities, a sharp depreciation in our main local currencies against the US dollar, and higher inflation levels, impacting our costs and expenses, ultimately offset by price increases in all our categories and geographies. In summary, during the second semester, we will decisively continue with our revenue management efforts, along with efficiencies to recover our profitability sustained on a solid business scale. Regarding our consolidated results, our revenues expanded 18.8%, bolstered by a 22.4% rise in average prices in Chilean pesos, while volumes contracted 2.9%. The better average price in Chilean pesos was mainly explained by revenue management initiatives and price increases. EBITDA weighed 32,4701 million Chilean pesos, down 47.3%, and EBITDA margin decreased from 13.1% to 5.8%. The weaker financial results were mainly associated with: 1) high cost from raw and packaging materials; 2) the depreciation of our main local currency against the US dollar impacting negatively our US dollar denominated costs, partially compensated with export revenues; and 3) cost and expenses pressures associated with an accelerating inflation in our main geographies and higher oil prices. The price efforts mentioned above were definitely not enough to offset these external effects. Hence, the need to strengthen our revenue management initiatives in the coming quarters, resulting in net income totaling a loss of 10,455 million Chilean pesos versus a gain of 18,968 million Chilean pesos last year, caused by the lower degree mentioned above and a higher loss in non-operating results, the latter mostly driven by higher net financial costs owing to a larger debt. In the Chile operating segment, our top line expanded 3.7%, due to a 7.3% growth in average prices, while volumes declined 3.4%. The higher average prices were explained by revenue management initiatives, partially offset by a negative mix effect in the portfolio. Lower volumes were caused by a high comparison base and the less favorable consumption environment; gross profit contracted 19% mostly as a consequence of cost pressures and a 17.6% devaluation of the Chilean peso against the US dollar affecting our US dollar denominated costs. MSD&A expenses grew 5% and, as a percentage of net sales, increased 43 basis points, where efficiencies helped us to offset expenses pressures coming from higher inflation and oil prices. In all, EBITDA reached 23,711 million Chilean pesos, decreasing 69.1%. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 70.9% rise as a result of an increase in average prices, while volumes contracted 1.7%. The better average prices were mostly explained by the revenue management initiatives in all the geographies. In terms of our geographies, volumes in Argentina and Paraguay expanded versus pre-pandemic levels, while Uruguay was flat and Bolivia declined. Gross profit expanded 73.7%, MSD&A expenses as a percentage of net sales improved by 235 basis points, the efficiencies compensating higher inflation and other cost pressures. All together, EBITDA weighed 1,072 million Chilean pesos versus a loss of 2,223 million Chilean pesos last year. The Wine Operating segment's revenues were up 16.7% explained by a 17.4% growth in average prices, while volumes decreased 0.5%. The higher price in Chilean pesos was mainly explained by a positive impact on export revenues from depreciation of a 1 trillion pesos versus the US dollar, revenue management initiatives in Chile and Argentina domestic markets, which permitted us to partially compensate higher costs in packaging material and inflationary pressures. Consequently, gross profit expanded 13.6%, MSD&A expenses grew 17.9% and, as a percentage of net sales, increased 26 basis points in all EBITDA with 11,788 million Chilean pesos, a 9.1% rise. In terms of our main international joint ventures, in Colombia, volumes remained growing double digits in the second quarter, driven by beer and malt. In terms of financial results, our increase in business scale together with revenue management initiatives allowed us to improve last year profitability levels, in spite of cost pressures and the recent devaluation of the Colombian peso against the US dollar. In Argentina, our JV with Aguas Danone de Argentina S.A showed strong top line growth, led by volumes and prices. Now I will be glad to answer any questions you may have. After repeating that, our main challenge during the second semester will be to continue with our revenue management efforts, along with efficiencies to recover our profitability sustained on a solid business scale.
Operator, Operator
We will now take the first question.
Fernando Olvera, Analyst
Hey, good morning, everyone. This is Fernando Olvera of Bank of America. Thanks for taking my questions. I have two, both related to Chile. On one side, can you comment on what were the dynamics between consumption at home and away from home during the quarter? And how do you expect these two channels to behave ahead of a less favorable consumption environment? And my second question is related to beer. Can you talk about how the demand behaved between premium and non-premium brands also during the quarter and what are your expectations for this segments ahead? Thank you.
Patricio Jottar, CEO
Okay, thank you, Fernando, for your question. Look, on-premise consumption in Q2 2019, which is before the pandemic, was 10.6%. Q2 2022 was 6.2% after being zero in the middle of the pandemic. So we have recuperated two-thirds of volumes, more than two-thirds of the proportion on total sales that we present to buy this channel and we expect to recover the remaining third, but very soon because things are moving towards normality. This is regarding these. As for premium, before the pandemic, premium used to be 25% of our volumes in 2019. During 2021, this percentage dropped a lot because of the enormous amount of money resulting from pension funds and government aid statements to consumers. So these figures on average, in 2021, were 40%, but beginning in 30% at the beginning of the year in 2021 and ending more than 50%, almost 55% in December 2021, which is quite a lot. In Q2 this figure is 43%. So we have declined from the top which was 53 or 55 in November, December 2021 to 43 in Q2 2022.
Fernando Olvera, Analyst
Great. And given that the economic environment led to low consumption, is it fair to assume that it should continue declining the proportion of premium brands?
Patricio Jottar, CEO
Difficult to say, but we expect this to happen. This is particularly challenging for us because for many years, Fernando, with inflation being 2% in Chile, we were able to not increase nominal prices of beer and gaining momentum and improving our profitability by two elements. Number one, the increase in the proportion of premium on one hand and the increase in per capita consumption on the other. So we were able to increase the scale and the profitability of our business without increasing nominal prices. Today, this is absolutely impossible. We need to be precise and try to increase prices in March, but it was just not nice in July again, but not going to be nice because inflation is too high, cost pressures are too high, and because we are decreasing the proportion of premium in our portfolio. So as I mentioned in my introduction, revenue management is going to be key in the coming months and we're focused on this.
Fernando Olvera, Analyst
Great. Thank you so much.
Patricio Jottar, CEO
Thank you.
Operator, Operator
Thank you. And we'll go ahead and take the next question.
Unidentified Analyst, Analyst
Hi, good morning. It's from Credit Suisse. Thank you for the opportunity to ask questions. I was wondering if you could comment on the consumption environment in Chile, considering sales and consumers trading down, and what's the outlook for the end of the year? Additionally, with the deceleration in volume across all regions, does this affect your pricing strategy going forward? How do you perceive the competitive environment in this context? Thank you.
Patricio Jottar, CEO
Thank you, Fernanda, for your questions. I mean, the comparison against the second quarter of 2021 it's impossible because we grew our volumes by more than 30% invested in that quarter. That is the reason why we are decreasing our consolidated volumes by 2.9% compared with that quarter. But again, when we compare the volumes of April 2022 with Q2 2019, which was the year before the pandemic, we have grown our consolidated volumes by 11.4% and double digits in non-alcoholic in Chile, and consolidated base 11.4%, accumulated ’22 first half of the year compared with accumulated 2019. So as the first half of the year, we have grown our volumes by 16%, and beer in Chile non-alcoholic, growing by more than 20%. We expect the trend for the future probably to be stable with equal levels of growth. It's difficult to know. But we think that 2023 volumes are not going to decrease, but they're not going to increase importantly. I would say that they will increase low single digits, we're just beginning our budgeting process. We are preparing ourselves for a very low level of growth, even stable volumes in 2023 compared with 2022. Even a scenario like these revenue management initiatives and dealing with our expenses and decreasing our expenses and being more efficient is key. All our efforts in the second half of the year are going to be in that direction. They're not going to be enough to save 2022 probably, but we are betting on a much better 2023 in this. Regarding the competitive scenario, it's difficult to know. But the cost pressures, inflation, and devaluation are being faced by every player in the industry, so I could imagine that the competitive environment will move in that direction. But of course, we don't know because it's unpredictable.
Unidentified Analyst, Analyst
Thank you so much.
Operator, Operator
Thank you. We'll take the next question.
Unidentified Analyst, Analyst
Good afternoon, everyone. Thanks for hosting the call and for taking our questions. We also have two. Patricio, I think previously in the first question, you mentioned that you placed two price hikes year to date, but this has not yet been enough to cover fully cost inflation, right? So I was just wondering, what is the incremental pricing that would be needed in order to theoretically offset the ongoing cost inflation, and what is your plan to tackle this going forward throughout the second semester? This is the first question. The second question is regarding efficiency; obviously, the transformation plan has yielded strong results over the previous quarters. But competition is high and the operating environment is a little bit challenging, right. So I'd just like to know what is the buffer for further efficiency to partially protect your margins going forward? And how does this fit with your need to continue to invest in brand equity in order to protect your market share? Those are the questions. Thank you very much, guys.
Patricio Jottar, CEO
I have a question about efficiency. The transformation plan has produced impressive results in recent quarters, but the competition is fierce and the operating environment is somewhat difficult. I would like to understand what additional measures you have in place to enhance efficiency and safeguard your margins moving forward. Additionally, how does this align with your requirement to keep investing in brand equity to maintain your market share? Thank you.
Operator, Operator
And we did experience a brief interruption in the conference. Please remain on the line. Thank you.
Patricio Jottar, CEO
It's okay? Yes, I made a complete answer to your question, but when I realized that…
Operator, Operator
The line…
Patricio Jottar, CEO
The line was not there. So we don't know if you listened to the answer or if I go again to the answer.
Unidentified Analyst, Analyst
Not at all, Patricio…
Patricio Jottar, CEO
Okay…
Unidentified Analyst, Analyst
Based on my end, I didn’t hear, sorry.
Patricio Jottar, CEO
Perfect. I will go again, then. Thank you very much. As you mentioned, you're right, I said that we have implemented two price increases in the year, the first one was in March, April, and the second one in July. So the results of Q2 just incorporated the first price increase, but did not incorporate the second price increase as it happened in July. Your question. As I mentioned before, the two price increases are not enough to compensate the swift inflation we are experiencing on raw material inflation, devaluation, and we will have to make more revenue management initiatives. As for the future, the amount we should increase to fully compensate and recuperate profitability in 2023, which is our goal, but I cannot disclose this, but we are committed to moving in that direction.
Unidentified Analyst, Analyst
Go ahead.
Patricio Jottar, CEO
No, no, that's it. Are you there? Did you follow my answer?
Unidentified Analyst, Analyst
Yes, yes, Patricio. I did. Just want one question; do you think there's space in the short term for customers to absorb further pricing?
Patricio Jottar, CEO
I think yes, because it's a phenomenon which is happening in almost every category, and in the case of beer, probably was not fast enough as we should have been. We should have done, and within yes.
Unidentified Analyst, Analyst
Clear, I am sorry for taking over guys. But I'm just not sure if you follow my final question. I had one regarding efficiency, and the role that it might play on profitability going forward? For sure, we know that the transformation program we have in place has yielded strong results, right? I just wonder how much further room do you believe there is for efficiency and operating leverage to help you protect profitability, knowing that competition is catching up? And it will probably need to revamp marketing and investments into brand equity, right? So how does the equation fit, and how much efficiency could be another lever for you to protect profitability going forward?
Patricio Jottar, CEO
Okay. This is a very good question. Number one, I have mentioned it many times and I will repeat, we never reduce marketing expenses to improve our profitability because brand equity is key in our business, to protect our market shares and to protect our business scales, and to protect our ability to increase prices, because without brand equity, you cannot sell volumes, nor prices in the market. Our brand equity indicators are getting maximum levels in Q2 2022, and we are very happy with this result because it will give us a lot of confidence that we are moving in the right direction. That is number one. Number two, to keep scaling our business, the reason why I mentioned during this conference call that our scale is there, is because in this scale it's very difficult to keep efficiencies. Having said these two things, I will go directly to efficiency. So we have done many things, but we discover new opportunities to be more efficient. We have this transformation plan in place. We are setting objectives for 2023; there's still room in many areas to be more efficient in sales and sales execution, definitely in our factories, in logistics and distribution indeed. We just implemented the same thing, replacing PeopleSoft in our operations, and we're just categorizing and we’ll bring a lot of efficiencies on the administrative side from this. Again, our business at the end of the day it's about brand equity, scale, ability to keep market shares, ability to have good prices, and the ability to operate with a high level of efficiency. So those are the basics. In place that you should study, we are moving with a lot of determination across all these elements to recuperate profitability because we feel uncomfortable with the profitability of Q2 definitely. We expect to improve profitability, particularly in 2023. I like to say to my team here in CCU that it's possible to have a bad year, but we are never allowed to have two bad years in a row and are putting all our efforts into having a good 2023. Again, we feel confident about our ability to do this, particularly because the brand equity for our portfolios is at maximum levels in Q2, and we know what we need to do, and we are going to do this.
Unidentified Analyst, Analyst
That’s all. Thank you very much, very clear, Patricio. Thank you.
Patricio Jottar, CEO
Thank you, Thiago.
Operator, Operator
And we'll take the next question.
Felipe Ucros, Analyst
Hi, Patricio and team. Thanks for the opportunity to ask questions. This is Felipe from Scotiabank. I want to follow up on Thiago’s point regarding the timing of your pricing strategy, as it seems clear that in Chile, you needed to adjust your prices. You mentioned the price increases from July, so I’d like to ask about your competitive landscape. One concern we have is that your competitor is hedged while you are not. If that's the case, they might be able to maintain their prices longer. How did you perceive the competitive environment in July after you adjusted your pricing, and how do you think consumers responded to those changes?
Patricio Jottar, CEO
Extremely difficult to know, Felipe. Look, in March we increased the prices in Chile and competition took one month in some channels and two months in other channels to follow. Meanwhile, we lost a little bit of market share. Then after two months, they finally followed us. In June, we will keep rate with the market share. We have to face the biggest price increase, but in the meanwhile, we lost market share. With pricing last week, we don't know if they're going to follow or not; it is impossible to know. Probably, we're going to lose market share for a couple of months and it's very - finally follow as good. If not, we are determined to adjust prices because we need to do this to recuperate profitability in our business.
Felipe Ucros, Analyst
That's well clear. Thanks a lot for that color. And let me follow up with another one on Argentina. You guys were not alone, investors; about half of our coverage has operations in Argentina. The numbers have been all over the place because of the difference between inflation and devaluation. So I'm just wondering if at a certain point whether you explore to separate Argentina as a different bucket just so it doesn't, I guess, mix up the numbers in the rest of the international division. Do you guys ever contemplate something like that?
Patricio Jottar, CEO
Yes, I mean, you're right, Felipe. This has happened in Argentina many times in the last, I don't know, 20 years where inflation moves in one direction and they keep the money with the Argentine currency without devaluation. So you make a lot of money, but it's the kind of brackets artificial money, and then they catch up with the exchange rate producing a huge devaluation and your results in US dollars deteriorate a lot, and then you catch up while inflation can send you could adjust prices. This has been our life in Argentina for many years, and it's a roller coaster of Argentinian descent. In 2023, they evaluate more than inflation; probably we are going to suffer in our results. I mean, that a huge proportion of the resources international business comes from Argentina, but let’s think if it makes sense to separate or not Felipe. I prefer not to give you an answer, not to give you an answer now. Again, if you consider the whole results of the international division, Argentina represents a huge proportion.
Felipe Ucros, Analyst
Yeah, that's very clear. Thanks so much for the call. Maybe I'll do a last one on hedging. I think in our coverage, and I don't know if this applies to the rest of the analysts on the line, but I could hear the last company that doesn't do raw material and FX hedging. You know, it gives you less time I guess to react, right? When you have very sudden moves, like the move you have in the last quarter on that tracks, just the last two or three months actually. Do you ever contemplate maybe exploring starting a hedging policy? Or is it something that the board has completely stretched out, and it's not even being considered?
Patricio Jottar, CEO
I mean, if I don’t want to say obvious. I mean, you know that if the raw material is going to increase its pricing, this would have - it's a good idea to share it. If you know that the raw material is going to decrease its price, it's a bad idea to hedge. It happens; you never know what's going to happen and you hedge long term. At the end of the day, you will be paying a high cost of raw material, because you will be paying the cost of raw material plus the margin implicit in the context to fit the price of raw materials. So long-term to take is a bad idea because you'll finish paying a high cost of raw materials. But it does not take; you face more volatility. But you do not destroy value. At the end of the day, to fake bullet volatility and to feel the impact of a change in the cost of raw material immediately obliges you to move faster in taking the next you are documenting your business to cope with this changing raw material. So it's not a matter of the board; it's the matter of report. A matter of managing, you are completely convinced that it's not a good idea to quit, and we'll continue keeping these strategies.
Felipe Ucros, Analyst
I'm just so desperate clear, that gives us a lot of color about how you guys are thinking about it. So thanks a lot for that. Appreciate it.
Patricio Jottar, CEO
Felipe, thank you.
Operator, Operator
Thank you. And we’ll go ahead and take the next question.
Unidentified Analyst, Analyst
Hi, hello. This is Enrique from BTG. Thanks for taking my questions. I also had two, both of them in Chile. The first if you could just please give a little bit more details on the performance issues, performance in the beer and non-alcoholic categories during Q2, and how that builds up to the volumes that you delivered in the quarter, I think it would be very helpful. And the second in Chile in terms of your margin recovery during the second half of the year. Still, a lot of moving parts but for Q3, I think that the effect is playing a little bit against quarter-on-quarter. But you have been improving; I think commodity prices and also the price hikes that you did. So just thinking if it makes sense to think that Q2 should be our low point in margins in Chile. Meaning right, if Q3 it should already touch some recovery. Thanks very much.
Patricio Jottar, CEO
Thank you, Enrique, for your questions. Look, I think that the best way to do a percentage, how volumes in Q2 were in Chile, is to compare them with Q2 2019. If you need this comparison, beer in Chile was 11.5% higher and non-alcoholic was 19% higher. And if you take the whole semester for the first half of 2022 and compare it with the first half of 2020, 2019, excuse me, beer is still 20.8% better and non-alcoholic 20.4%. So we have increasing volumes in a very good way. And the last two years that because from 2019 to 2022, in 2021, 20% 21% growth means 6% to 7% growth per year in the middle of this pandemic period, which is very good. So if you're comfortable on this, in an answer made before my question, maybe my answer was that regarding 2022, we expect the economy to be a little bit weaker. We assume that volumes are not going to decrease; they are going to go very easy the target in 2022. Having this in mind, if volumes come, good news, but I prefer to back it assuming that volumes will not grow and to grow the company to make money to have a profitable 2023 under this scenario. Regarding margins, it's very difficult to say, but to say that I think that Q2 was at bottom, and I expect to recuperate margin definitely in the rest of the year, but particularly for 2023. We're putting all the focus of management on fully recuperating margins in 2023. Are we going to be able to do this? Yes or no. It's impossible to say, but this is our focus to recuperate good margins that we had in 2022.
Unidentified Analyst, Analyst
That's very clear. Thanks very much.
Patricio Jottar, CEO
Thank you.
Operator, Operator
Thank you. We'll take another question.
Unidentified Analyst, Analyst
Hi, everybody. Thanks for taking my questions. This is Lucas from JPMorgan. Wondering if you can discuss a little bit of your performance in theory in Chile in the different channels where you sell, so in particular, you're suffering in any specific channel. So on-premise, off-premise, and then within the off-premise, like probably you see like, sort of key accounts versus mom and pop shops, so channels that have probably you have better profitability to filling more pain. So just wondering if you can give us some visibility on each of the channels in particular. And then just a follow up on the cost side, that you just mentioned that Q2 probably marks the bottom in terms of profitability. We've been seeing obviously the commodity prices falling in the exchanges, just wondering like, if realize when you bid for let's say barley, to already get out like lower prices? Or if it's just more of a - it's a financial reaction or sell off the exchanges. But how like the sellers are behaving? Are they already giving you lower prices for commodities if you could comment on these trends? Thank you very much.
Patricio Jottar, CEO
Thank you, Lucas, for your two questions. I will answer the first question and then I will ask Felipe Dubernet to go to the second question. Regarding channels, after the price increase in March, beginning of April, we lost a little bit of market share, while our competitors didn't follow. As I mentioned before, in the case of on-premise, we have a very good marketing share; we are extremely good in on-premise, a good market share in mom and pops and a little lower market share in supermarkets. If you consider these three channels, we got some market shares. Felipe, go on, I'm very good at brand equity again. Because behind the market share, at the end of the day, you have brand equity of your brand.
Felipe Dubernet, CFO
Lucas, yes, of course, we have seen a decrease on commodity pricing in US dollars, as you mentioned, aluminum, grains, and sugar. But what's happening is that these effects that are positive for us have been jeopardized by the highest thing, right? Because remember, all commodities have traded in US dollars. So if you look at the dollar price in Chile, it has been more than 900 pesos for US dollar compared to last year, when we had in Q2, 715 pesos. So it's a huge devaluation of the currency. So all the commodity reduction has been jeopardized by the US dollar impact. This is the reason why Patricio has been very clear that we need to continue to increase prices. So we are not at the point where the different forces like exchange rates and commodities need to be compensated for each other. Specifically, for barley, we need to wait until next season because we are dependent on the harvest in Chile and Argentina. So it's difficult to report, but this is the reality.
Unidentified Analyst, Analyst
Perfect. If I may, sorry to squeeze in another question regarding capital allocation, how to think about your CapEx this year, thinking that it can push forward to next year. And then on eventually buybacks and how to think about that, start at these levels?
Felipe Dubernet, CFO
Okay. Regarding operational topics, let's say. So we probably could not read PF would plan for 2022. We'll continue with these. However, we review - we are very careful in reviewing each project on a project-by-project basis. Because of course, we need to see, for example, mix changes, how the mix will evolve. We are in a very volatile environment. For example, premium has been decreasing, as Patricio said, from the top. Premium reached 55%, and then we are moving towards 40%. But in our view, premium would remain higher than 2019. So we need to review, for example, if we need to invest in our capabilities to do more premium rise etc. But for the time being in 2022, we keep our CapEx projection, the one we published, it will be. For 2023, of course, we are starting our budgeting process in September, and then we will be very carefully reviewing, given different changes in the portfolio, market dynamics, consumption, how this CapEx will evolve, but certainly it’s something that we are reviewing very carefully during the last quarter. No, I don't have an answer for your second question regarding buybacks. There's nothing to say about that.
Unidentified Analyst, Analyst
Thank you very much.
Operator, Operator
Thank you. And that does conclude the question and answer session. I'll now turn the conference back over to you for any additional or closing remarks.
Patricio Jottar, CEO
Thank you very much. As we mentioned before, in the second quarter of 2022, we face a challenging and volatile macroeconomic scenario, which will probably remain in the short term. In order to face these challenges, we will focus on two key aspects to recover our profitability: number one, maintain or grow our business scale; number two, support our main categories and geographies; and number three, manage expenses and cost efficiencies in our information program. This is not the first time we have faced such a challenging scenario. But we believe that with the mentioned strategy, we will be able to overcome it as we have successfully done in the past. Thank you very much.
Operator, Operator
That does conclude today's conference call. We do thank you for your participation. Have an excellent day.