Earnings Call Transcript - CCU Q4 2023

Operator, Operator

Ladies and gentlemen, good day, and welcome to CCU’s Fourth Quarter 2023 Earnings Conference Call on the 28th of February. Today’s conference call is being recorded. At this time, I would like to turn the conference call over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir.

Claudio Las Heras, Head of Investor Relations

Welcome, everyone, and thank you for attending CCU’s fourth quarter 2023 conference call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; and Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company’s consolidated fourth quarter 2023 results. Felipe will review our overall results, and we will then move on to 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 our CFO, Mr. Felipe Dubernet.

Felipe Dubernet, CFO

Thank you, Claudio, and thank you to all for joining us today. During 2023, we posted a recovery in our operating results and profitability despite the volatile business environment, especially in the wine export business and Argentina’s macroeconomic conditions. Our consolidated EBITDA in the year grew 6% and the EBITDA margin improved 159 basis points, driven by our main operating segment, Chile, which expanded EBITDA by 24.8%, more than offsetting a 37.4% drop in the Wine Operating segment and a 16% contraction in the International Business Operating segment, which includes Argentina. Consolidated net income contracted 10.6% versus 2022. The driver for the better operational result was the execution of our regional plan HerCCUles, which encompasses six pillars: Number one, maintain business scale; number two, strengthen revenue management efforts; number three, deliver efficiency gains through our transformation program; number four, optimize CapEx and working capital; number five, focus on core brands and high-volume margin innovations; and number six, continue investing in our brand equity. I would like to briefly mention some of the highlights of the year for each pillar. In terms of pillar number one, consolidated volumes in 2023 were 3.4% below last year, mainly driven by lower consumption in Argentina, a tough scenario for Chilean wine export, and a deceleration in volumes in Chile during the second semester. Nonetheless, we maintained relative scale by keeping increasing market shares in our main categories. As for pillar number two, we executed revenue management initiatives in all our geographies, especially noticeable in Chile, where average prices increased 7.9%, which was key to recovering margins and offsetting cost and expense pressures and negative mix effects. Regarding pillar number three, we were able to deliver efficiency during the year, as total expenses, including manufacturing costs, MSD&A as a percentage of net sales were stable at 47.7% in 2022 and 2023. In terms of pillar number four, we recovered our cash generation, mainly due to a reduction in working capital versus 2022, CapEx optimization, and a higher EBITDA. Finally, in line with pillars number five and six, we reduced the number of SKUs allowing us to focus on core brands and profitable innovation, reducing the complexity of our operations. From a quarterly perspective, consolidated EBITDA dropped 9.9%, while EBITDA margin was up from 16% to 19.3%. In this quarter, it is important to mention that the depreciation of the Argentine peso against the U.S. dollar had a material impact on our results in the fourth quarter of 2023. The Argentine currency surged by 131%, the exchange rate shifted from CLP350 to CLP808.5 per dollar as of December 31, 2023. Thus, Argentina is under hyperinflation accounting, according to IAS 29, accumulated results in Argentina as of September 30, 2023, are updated to prices and exchange rate levels to the end of the period. This generated a loss in the quarter of CLP24,018 million in consolidated EBITDA, of which CLP22,804 million were accounted in the International Business Operating segment, and CLP1,250 million were accounted in the Wine Operating segment. Excluding these effects, consolidated EBITDA in the quarter would have expanded 3.4% versus the same quarter of last year. In terms of the segment, in the key operating segment, top-line decreased 2.2% in the last quarter due to a 7.3% contraction in volumes, partially compensated by 5.5% higher average prices. Lower volumes were mostly related to weakened demand, especially affected by weather conditions. While prices were driven by revenue management initiatives, EBITDA increased by 20.9%, and EBITDA margin improved and expanded from 14.2% to 17.5%. In the International Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales dropped 90%, mainly as a result of a contraction of 89.4% in average prices in Chilean pesos due to the impact of hyperinflation accounting stated above, as prices in local currency evolve in line with inflation. Volumes contracted 8.3%, fully explained by Argentina, as all the other geographies posted positive volume growth. EBITDA contracted 53.7%. In the Wine Operating segment, revenues were down 11.7%, mainly explained by an 8.8% decrease in volumes driven by a 10.2% decrease in the Chile domestic market and a 5.6% contraction in exports from Chile. Average prices contracted by 3.1%, also due to the impact of hyperinflation accounting stated above in our wine business in Argentina and a stronger Chilean peso against the U.S. dollar, which negatively impacted our export revenues. Partially offset by revenue management initiatives in our domestic markets, EBITDA decreased by 21.3%. Regarding our main joint venture and associated business from a yearly perspective, in Colombia, volumes contracted in low single digits in 2023 during a scenario of weaker consumption. In Argentina, our water business recorded mid-single digit growth in volumes, despite the complex economic environment, explained by the strength of the brands and a successful route-to-market integration of this business into our operations. 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. The first question is from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.

Felipe Ucros, Analyst

Thanks operator. Good morning, Felipe, Joaquín, and team. Thanks for the space. So my first question is on Argentina. Obviously a messy quarter. All the hyperinflationary accounting effects kind of muddy up the quarter. But how did the quarter start for Argentina in 2024? How are things looking there? And then if I can, I'll do a follow-up. Thanks.

Felipe Dubernet, CFO

Thank you, Felipe, for your question regarding Argentina. The quarter maintained exactly the same trend as we had in quarter four. So we continue to increase prices in line with inflation. The inflation level during January was 20.5% in Argentina. This is public data. And we are experiencing industry contraction of, let's say, high single digits during January for the time being. It is expected that we will have a lower level of inflation in Argentina in February. We do not have official data, but we will continue our revenue management efforts there in order to maintain profitability in Argentina.

Felipe Ucros, Analyst

Great. Great. Before I move to the next question, Felipe, great comment on how the consumer is doing. Let me ask you, do you expect margins to deteriorate as you eventually have to adjust employees in Argentina, or what type of margin environment do you expect as the year starts?

Felipe Dubernet, CFO

Look, I will not give you a forward look. In Argentina, all the pillars of HerCCUles are completely valid. Of course, we would like to maintain business scale, but it would be difficult given the macro environment. But at least relative scale we are maintaining thanks to this because our portfolio ended up getting in a very strong way. So the relative scale would be maintained. The big answer would be how much the industry would suffer. The good news is if the government plans work in terms of achieving lower levels of inflation, maybe we could experience some relief in terms of the contraction of the volumes. But all the pillars are focused on not suffering in profitability terms. We will continue revenue management efforts there as I pointed out, efficiencies are key. A number of projects in several areas, logistics, manufacturing, and expense control are very valid on that. Also, taking care of cash is important for working capital inventory reduction. We have, in fact, reduced our inventory levels, to work with less safety in terms of reacting, while maintaining flexibility towards the market in a more efficient way. Also, portfolio rationalization is crucial. Enhancing and investing behind returnable packaging is also a way to protect our profitability. And of course, because all of this needs to be possible thanks to our strong brand equity to continue investing behind the brands, because without a stronger brand, it would be very difficult to maintain our relative scale.

Felipe Ucros, Analyst

Very clear. Thanks very much for that. Maybe if I can do a second one on Chile. Weather seems to have been a factor in the quarter, and I think your peers reported exactly the same thing. So I'm wondering how did results look if you didn't have the weather effects? And what I mean is I'm trying to gauge how the consumer is doing if you put aside the weather factor?

Felipe Dubernet, CFO

Oh, that's very difficult. I asked for a we need an algorithm for that. Of course, we have some internal algorithms, but is predicting how much? So I think there is a weaker demand in the consumer. The consumer is not in the same shape as it was in 2021 and the beginning of 2022. We know that. We have had two bad quarters, quarter three and four, in terms of not having good weather conditions for selling refrigerated drinks. The majority of our portfolio needs to be consumed as drinks. Of course, it was unfavorable in terms of rain and temperatures. So factoring out the weather would mean we decreased by 7.3%. I would not attribute 100% to the weather, but I don't have an exact number to provide to you on how much the weather would influence this decrease in volume, which would be difficult to ascertain. Maybe an indicator could be quarter one, where we have had more stable weather in terms of temperatures, but still it is too early to evaluate quarter one. January has started in good shape with low-single digit growth because we have more normalized weather. However, as I mentioned in previous conference calls, it's difficult to give you future forecasts because of several risk factors and uncertainties. I think low-single digit growth between mid- and low-single digits should be attainable if we take out the weather, and it's aligned with GDP in Chile.

Felipe Ucros, Analyst

That's super helpful, especially the comments on January. That helps us a lot. So thanks for that, Felipe. I will hand it back to you. Thanks.

Operator, Operator

Thank you very much. We also have acknowledged the text question from Mr. Pablo Bello from BTG, which we believe was answered in this answer about Argentina. The next voice question comes from Mr. Fernando Olvera from Bank of America. Please go ahead. Sir, your line is open.

Fernando Olvera, Analyst

Hi. Good morning – good afternoon. Thanks for taking my questions. I have two. The first one is related to Chile. If you can comment on your outlook on costs and how FX will play in coming quarters? And if you can share some color on how margins should behave this year, particularly in Chile? That's my first question, and I have a second one. Thanks.

Felipe Dubernet, CFO

First of all, Fernando, thank you for your question. Yes, I would. Of course, you pointed out the main risk that we are facing nowadays in terms of FX. Today, USD is at 980, which is much higher than what we had in previous quarters. There is pressure on that. As an example, last year, the average exchange rate in Chile was 839. Now we are, let's say, more than CLP100 more, so this is more than a 10% increase. This will certainly have an impact on our P&L and cost structure. Although commodities are stable with the exception of sugar, the need is to compensate that in order to maintain stable EBITDA margins. For this, we need to enhance our revenue management efforts and our efficiency efforts to speed up some projects that we have in terms of efficiencies. Improved mix is also a way to compensate for this pressure in terms of the U.S. dollar. This is fully aligned with HerCCUles; however, you pointed out that it is one of the significant risks we are facing.

Fernando Olvera, Analyst

Okay. Great. Felipe, and my second question is related to your SKU reduction. If you can comment on that to give us an idea of how many SKUs you eliminated in 2023? Any idea of how this favors your profitability and if you are going to continue with the SKU reduction this year? Thank you.

Felipe Dubernet, CFO

We took out about 100 SKUs, but this represents, in terms of percentage, about 5%. However, the goal is not to reduce all the time by tackling the tailing SKUs, let's say. The incentive of that is to ensure that if we need to launch something, it should be relevant innovation that has better margins and improves the brand equity of the category and portfolio while delivering higher volumes. So at the end, it's an exercise about discipline.

Operator, Operator

Thank you very much. Our next question comes from Mr. Ulises Bolio from J.P. Morgan. Please go ahead, sir.

Ulises Bolio, Analyst

Hi guys. Thanks so much for the space questions. A couple of follow-ups on my side. So first on the Chile volumes; can you provide a little bit of detail on how the performance was there on the alcoholic versus non-alcoholic? And maybe double-click there on how those more premium beer categories continue to perform there? And then the other one on FX, I just wanted to hear your thoughts more or less on what is being embedded in your budget in terms of FX for the year? And what are you thinking in terms of the pricing that you need to do to offset this pressure? Thanks so much.

Felipe Dubernet, CFO

Yes. Regarding your first question, volumes in quarter four were precisely the same in both non-alcoholic and beer; no big difference in terms of decrease for both. We are talking about between mid- to high-single digits. The overall decrease in volumes in Chile was 7%, so it was quite similar across the board. About FX, yes, we will experience a significant effect. More or less 70% to 75% are linked to the U.S. dollar in our direct costs, raw material costs, packaging material costs, and also energy costs. Thus, we need to employ efforts in revenue management certainly to compensate. Every CLP10 of devaluation is about CLP2,000 million effect in our EBITDA being compensated by our export business, particularly in wine, which somewhat balances at the consolidated level. If you have a sustained CLP100, we need to deliver between CLP20,000 million to CLP25,000 million. This is substantial if you look at the total EBITDA of Chile. Thus, it should be a combination of tools such as revenue management, efficiencies, cost, and expense control to stabilize margins.

Ulises Bolio, Analyst

Okay. Thank you. That is very clear. And then just on that FX question. Are you able to share more or less what you are budgeting in terms of that, like for your plan for 2024? What kind of FX are you using? And then just to have that as maybe a benchmark of what we should be thinking about in that sense and the impacts on costs?

Felipe Dubernet, CFO

I’m not an economist; I am not a methodologist, so I cannot predict the weather or the exchange rate. I would not like to make a prediction on the exchange rate. I can provide you with the current exchange rate, which is the best projection we have. Currently, the spot price is CLP960. I will ask Joaquín how far the predictions of the U.S. dollar estimate. Yes, it’s accurate as you said. Today, the spot price is CLP960, while the average of last year was CLP840. So there is pressure in the exchange rate that has increased since January.

Operator, Operator

Thank you very much. We have a follow-up question from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir.

Felipe Ucros, Analyst

Thanks, operator. Since it seemed there wasn’t anybody else in the queue, I thought I’d take advantage and ask another one, Felipe, so thanks. I know wine is not the largest segment, so it might be unusual to ask about this one. But strategically speaking, it’s the segment that seems more challenged in the long term. Volumes have been falling for the larger part of the last few years. I know it’s not a CCU problem; it’s an industry problem. We’ve seen it across wines throughout the world. But just wondering if there’s a plan to kind of turn around that dynamic or offset that decline in wine consumption. Anything you guys are thinking of to improve performance in that segment?

Felipe Dubernet, CFO

Yes. Thank you, Felipe, for your question. We suffered a terrible 2023 in the wine export industry, not only in Chile but also in Argentina. I saw some numbers yesterday showing a decrease in Australia exports, Chile exports as well. There are factors related to the carrying inventory units of places that are far from consumption centers. This impacts the economics of export and given the interest rates, especially in the U.S., which have not decreased. The same interest rate makes us less competitive in terms of carrying inventory costs. We experienced this in 2023. Now, what I would say is that we are seeing some embryonic good signals in terms that we expect at least in the first quarter to achieve some growth with respect to export volume. As you pointed out, there is a global trend in wine consumption that has decreased, but there are some tools we need to explore. Premiumization and innovation in the industry need attention. We are innovating a lot, especially in the domestic market in Chile through brand extensions, sweet wine to maintain scale in the domestic market. Sparkling Wine is doing very well. Exports are more complicated because, as I mentioned, we have constraints in terms of global branding—no one has a truly global brand in wine; it's country by country, region by region, which makes it difficult. Thus, what we are focusing on is making it more profitable and sustaining scale while potentially growing in specific markets is to improve our execution. We opened a commercial office in China, also in the U.S. and in the UK, and with these three new endeavors, we believe we could significantly improve execution in those markets.

Felipe Ucros, Analyst

That’s very clear. Thanks so much for the detail.

Claudio Las Heras, Head of Investor Relations

Thank you very much. Our final question is a text question from Mr. Alessandro Conti from Jefferies. Are you planning on initiating cost-cutting initiatives, especially in Chile? Do you foresee any improvement in margins?

Felipe Dubernet, CFO

Yes. Cost-cutting seems a bit aggressive; I would say cost control to make better use of the same resources. However, our efficiency plan is in place in terms of improving expenses. The key indicators are expenses over revenue, and we need to reduce that in the long-term and also this year. We have plans for that, especially at the expense level. The cost dynamics depend significantly on the market, exchange rate, and direct costs of raw material, packaging materials. It’s a key pillar of HerCCUles aimed at efficiencies to keep pace with these gains. Whether this will be reflected in the bottom line will depend on other factors.

Operator, Operator

Thank you very much for the answer. We see no further questions at this point. I’ll pass the line back to the management team for their concluding remarks.

Felipe Duberet, CFO

In 2024, we will continue working under our three strategic pillars: growth, profitability, and sustainability, and we will keep implementing HerCCUles. We know that the environment in the region will continue to be challenging, especially in Argentina. Nonetheless, we expect to continue on the recovery path of our financial results and profitability. Finally, I would like to thank all our employees. Thanks to their hard work and commitment, we have been able to navigate challenging years at CCU. We will continue working united to sustain a path of profitable and sustainable growth. Thank you, and have a wonderful end of the day.

Operator, Operator

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