Earnings Call Transcript - CCU Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Good day, and welcome to CCU's Fourth Q2022 Earnings Conference Call on the 1 March 2023. Today's conference call is being recorded. At this time, I would now like to turn the conference over to Claudio Heras, the Head of Investor Relations. Please go ahead, sir.

Claudio Las Heras, Head of Investor Relations

Welcome, everyone. Thank you for attending CCU's Fourth Q2022 Conference Call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; and Mr. Carlos Anwandter, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated fourth Q2022 results. Felipe will now review our overall performance, and we will then move on to our 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 Felipe Dubernet.

Felipe Dubernet, Chief Financial Officer

Thank you, Claudio, and thank you all for joining us today. In 2022, we faced a particularly challenging year for the profitability of the business, especially in Chile. Consolidated EBITDA dropped 19.6%, while EBITDA margin deteriorated from 17.9% to 13.2%. Financial results were mainly affected by negative external effects coming from the depreciation of our main local currencies against the U.S. dollar and higher prices in raw materials, packaging, and energy, impacting our costs. The latter was partially offset with prices and efficiencies. Net income contracted 14.7%. In spite of the deterioration of our results, I would like to comment on the actions that we took in 2022, which put us in a position to look for profitability improvement in 2023. First, we were able to preserve business scale as volumes decreased 1.1% despite a high comparison base from last year and a weaker consumption environment. Second, we overall kept market share in our core categories. Third, we strengthened our portfolio of brands by reaching historically high brand equity levels in our main category in the region. And fourth, we implemented revenue management initiatives in all our geographies to mitigate cost pressure with prices in line with inflation in our main categories by the end of the year, especially in Chile. All of this will be enhanced this year by the implementation of HerCCUles 2023, a recovery profitability plan, which encompasses six pillars: Maintain our business scale; strengthen revenue management efforts; enhance the CCU Transformation program to deliver efficiency gains in costs and expenses; focalize and optimize CapEx together with optimizing working capital; focus on core brands and high-volume margin innovation; and continue investing in our brand equity. I would like to mention that by the end of the year, we started to see some positive trends from this, especially in Chile, reflected in prices, which expanded in line with inflation and efficiencies in costs and expenses. From a quarterly perspective, in Q4 2022, we continued operating in a tough economic environment, which impacted consumption. Top-line decreased 6.6%, driven by a 5.5% drop in volumes; however, we achieved 10% growth versus Q4 2019, alongside a 1.1% decrease in average prices in Chilean pesos. EBITDA contracted 21% and EBITDA margin decreased from 18.9% to 16%. This was mainly associated with the same negative external effects that impacted us during the year. Net income fell 36.4%, caused by a lower operational result as explained, and a greater loss in non-operating results, mainly driven by higher financial expenses due to a larger debt. In terms of our segments, in the Chile operating segment, top line grew 3.6% in Q4 2022 due to a 12.4% growth in average prices, partially compensated by 7.8% lower volumes. However, with growth against Q4 2019, we grew 12.7%, primarily due to a very high comparison base in 2021. EBITDA decreased 24.4%, and EBITDA margin decreased from 19.4 to 14.2. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales dropped 27.6%, mainly as a result of a contraction of 26.7% in average prices in CLP, although the increase in local currency was in line with inflation, while volumes contracted 1.1%, resulting in a growth of 4.7% against Q4 2019. EBITDA went down 19.7%, negatively impacted by the exchange rate translation effect in Argentina related to hyperinflation accounting. In the Wine Operating segment, revenues were up 3.2%, mainly explained by a 5.7% growth in average prices, partially offset by a 2.4% contraction in volumes, achieving 8.4% growth versus Q4 2019. Regarding our main joint ventures and associated business, in Colombia, where we produce and distribute beer with Postobón, top line growth was almost 20% driven by volumes and average prices. Thus, we continue expanding business scale during the year. In Argentina, our recently acquired water business, where we have a joint venture with Danone, showed strong top line growth led by volumes and higher prices, allowing recovery in financial results. Both JVs represented CLP 7.4 million as of December 2020. Now I will be glad to answer any questions you may have.

Operator, Operator

Our first question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead. Your line is open.

Felipe Ucros, Analyst

Let me start with the normalization of trends. The last few quarters have seen a bit of a reversal of the incredible premiumization that you guys saw over the previous two years. I think locations and channels have also been normalizing. So that's been a little bit of a headwind. Just wondering if you could give us an idea of how far you think you are from reaching a stable level on those metrics?

Felipe Dubernet, Chief Financial Officer

Thank you for your question. What I can say is that we have experienced throughout the year in 2022, especially from Q2, Q3, and now Q4. If you compare Q4 against the two previous quarters, we saw a sequential improvement in our results. For example, in Q2 and Q3, our margin contraction was a consolidated level of 700 basis points, and in Chile, it was a 1,000 basis points contraction in margin in those quarters. This was the bottom in terms of bad results. In Q4, the deterioration of the margin was half of what we experienced in Q2 and Q3, indicating that Chile is on the right trend to improve the margin. As we said on previous calls, it takes time to recover profitability, but all the actions are in place. We were able to catch up with inflation in Chile towards the end of the year, which is good news, alongside a more favorable exchange rate that should impact our cost base. Nevertheless, the big risk remains the industry volumes. We have preserved or even grown market share; the latest measure of market share at the end of the year and beginning of the year is very good for CCU, especially in Chile across all categories, both nonalcoholic and wine. However, we are seeing an industry deterioration. Despite this volatility, we will continue to experience sequential improvement as we experienced in Q4 compared to Q3.

Felipe Ucros, Analyst

Understood. Any details you can give us on premiumization and channels? How close are they to a normalized level?

Felipe Dubernet, Chief Financial Officer

We reached a very high comparison volume, especially because of the exceptional consumption growth that we experienced last year, but also a high premiumization in many categories, especially in alcoholic products. We are now experiencing a decrease in the premium mix, with consumers moving more towards mainstream brands. However, I would like to point out that the premium mix is still much higher than in 2019. We have experienced some normalization, but this has also jeopardized our price efforts. Regarding the on-premise channel in Chile, it has not fully returned to the levels seen in 2019. It has recovered, but not quite back to where it was.

Operator, Operator

Our next question comes from Mr. Lucas from JPMorgan. Please go ahead. Your line is open.

Lucas Ferreira, Analyst

I was just wondering if, regarding prices, you can get into more details about any new initiatives in place in the different markets. Are there any ongoing or new price hikes you plan to implement in the next few months as part of this normalization we're going to see? And the second question is about the costs. You mentioned that the effects were helpful to offset part of the cost impacts, but if you could comment on the raw materials, how you're seeing them? In the fourth quarter, how much of the decline, for instance, in the aluminum prices, occurred through the beginning of the second half of last year? How much of that is already in your COGS lines? Or if there's something else to come in the first quarter or second quarter?

Felipe Dubernet, Chief Financial Officer

Lucas, thank you for your question. Regarding pricing, we made announcements in previous calls in Q4. As you saw, especially in Chile, where we were behind on prices, in other major markets like Argentina, we aligned with inflation. In Chile, we really caught up in the last quarter of the year. The Chile Operating segment price increased 12.4%, practically in line with inflation. One of the pillars of our HerCCUles plan is to continue our revenue management efforts, which include not only price lists but also rationalizing promotions and working on pack mixes and price architecture to optimize our revenue. We will continue these efforts certainly. Regarding costs, the FX tailwinds we experienced were very helpful. Around 70% of the cost of goods sold are linked to the U.S. dollar. If you compare Q4, it was CLP 915 per U.S. dollar, and currently, today's spot prices are close to between CLP 800 and CLP 830. This is favorable in terms of easing the cost pressure. In terms of raw material commodity costs, aluminum prices have stabilized around $2,400 to $2,300 per ton. Compared to the average of 2022, this is $400 less, representing a 10% to 15% decrease. The combined decline in aluminum prices and a lower exchange rate would certainly help our costs. We have been carrying a little more inventory than usual as a precautionary measure taken after the Ukraine war, and this will deplete throughout the year. We expect to see a more favorable cost equation moving forward. However, it’s essential to note that our cost base per hectoliter is much higher than in 2019. Despite the positive trends, the commodity costs are still above their levels in 2019, and all the price actions we took will help to compensate for those trends.

Operator, Operator

Our next question comes from Mr. Sorabh Daga from HSBC. Please go ahead. Your line is open.

Sorabh Daga, Analyst

Thanks for giving me this space here. I have two questions, please, if I may. First, any comment on the premium side of the beer portfolio in Chile? How do you view the segment prospect portfolio, especially when you look at brand Heineken compared with some of the competitive brands like Corona? And then maybe a bit on revenue management. Can you comment on how you're managing the trade discounts and share some insights if trade discount management has improved over the last few years? Are you seeing positive prospects on these lines?

Felipe Dubernet, Chief Financial Officer

So Sorabh, thank you for your question. Regarding the beer portfolio, especially in major markets like Argentina and Chile, we manage a full range of price points and positioning across different brands. We are the leaders in draft beer in Chile, with a very successful brand. We also have a strong position in the international brands with Heineken. The evolution of our brands in Chile has been outstanding, gaining share and volume, showing very good performance. Heineken is also performing well, though at a lower growth rate. Royal, a local entry-premium brand, has also had tremendous growth over the last ten years, maintaining very good brand equity. Our mainstream brands are showing preservation or even growth in brand equity. Overall, we are pleased with our beer portfolio as it has reached the highest brand equity levels in the last ten years based on consumer preference. This strong brand equity allows us to have more pricing power, even if we do fewer promotions than the competition. Moreover, it favors our revenue management efforts. The key is that we are entering the year with very good brand equity, which supports maintaining our price points and rationalizing promotions and discounts.

Sorabh Daga, Analyst

That answers my questions. Regarding revenue management, I'd like to follow up on trade discounts. What about the mainstream and soft drinks as well?

Felipe Dubernet, Chief Financial Officer

We have clear strategies for premium, mainstream, and each brand has its role in a complex market like the Chilean one. Each brand also has a package strategy with different price points and positioning. In soft drinks, we have healthy brand equity, especially with good evolution from Pepsi. This robust brand equity also assists in designing our price architecture to maintain a healthy portfolio, which means we require fewer promotions to encourage consumer purchases. Our focus is on building strong brands rather than relying on discounts.

Operator, Operator

Our next question comes from Mr. Henrique Brustolin from BTG Pactual.

Henrique Brustolin, Analyst

I have two questions on my side, both of them in Chile. The first one, I would like to hear a little bit more on what are your expectations for the size of the market of alcoholic and nonalcoholic beverages in 2023, given the comparison basis and total volumes, which remain quite strong compared to pre-pandemic levels. Also, if you could just comment on how this brand equity, which is at a record level, compares to the market share and volume share you have today in Chile. The second question is regarding margins. If you could comment on how profitability in Chile evolved throughout Q4, particularly regarding your run rate going into Q1 after the price hikes you implemented?

Felipe Dubernet, Chief Financial Officer

Thank you, Henrique. You asked many questions, but I will try to address them as best as I can. As I mentioned, we are experiencing deceleration in the industry compared to 2022 and of course 2021, no doubt about that. It's difficult to determine how much this deceleration will be because while maintaining market share during Q4, we experienced a decrease; not only in alcoholic products but also in nonalcoholic products. The decrease in alcoholic was a high single-digit or practical double-digit decline, while in nonalcoholic, it was a mid-single-digit decrease. However, we are still talking about high single-digit growth against 2019. The question remains how much the decline will be in upcoming quarters. We are seeing this deceleration for sure after experiencing high volumes in 2021 and a significant portion of 2022. Regarding market share, we are pleased with the high levels of brand equity and growth in market share, especially in Chile for both alcoholic and nonalcoholic products. Our efforts in revenue management have been effective as we maintained market share while enhancing revenue management. Regarding margins, as I mentioned, Q2 and Q3 were the bottom regarding the margin reduction in Chile, reaching a 1,000 basis point contraction each quarter. Q4 saw a reduction of around 500 basis points and sequential improvement throughout the months of the quarter. We implemented pricing actions each month, along with improvements in costs, especially due to the exchange rate. We are optimistic about continuing this sequential improvement in the upcoming quarters. The key risk remains the volume risk due to industry deceleration, especially in alcoholic products.

Operator, Operator

We are going to be going through the text questions now. We have a couple of text questions. The first one comes from Maria from BDT Security. What is your vision of the HC Rebond covenant if the covenant change is not achieved?

Felipe Dubernet, Chief Financial Officer

Hey Michael, could you repeat the question, please? There was a low volume for one second. Thank you.

Operator, Operator

Sure. The question is what is your vision of the HC Rebond covenant if the covenant change is not achieved?

Felipe Dubernet, Chief Financial Officer

All right. Yes. We expect to achieve the change of the covenant to align with all the other local bonds that we have. If it is not achieved, we will certainly take actions regarding this bond, but we prefer to wait to see if we can achieve the change of covenant for now.

Operator, Operator

Our next question comes from Mr. Fernando Olvera from Bank of America.

Fernando Olvera, Analyst

Very quickly, my first question is for Colombia. If you can give us a breakdown of how much of top line growth came from pricing and how much from volume? How do you expect this top line to behave in 2023? It would be great. Can you also share what will be your CapEx this year and the main projects you are going to invest in?

Felipe Dubernet, Chief Financial Officer

Yes. Colombia was a challenging year, but we started very well in Q1, although we have experienced some industry deceleration. Most of the top line growth came from price as our volumes were slightly lower than expected; however, we are still building scale there. Going forward, we are looking at repositioning some brands, including a new value proposition in the market, and also continuing to improve or increase the brand equity while sustaining Heineken's performance. Regarding CapEx, our CapEx for 2022 was CLP 190 billion. We expect the CapEx level to be reduced moving forward this year. The main project will be the construction of a resin recycling plant to be built with an investment of up to $40 million. This is a key project aimed at fulfilling sustainability goals and addressing single-use plastic by 2025.

Operator, Operator

We have one more text question from Mr. Sergio Winter from Falcom Asset Management. Do you know if the competition in Chile has followed the price increases you implemented in the fourth quarter? Were those price increases made at the beginning, middle, or end of the quarter?

Felipe Dubernet, Chief Financial Officer

I would answer the question differently: We have increased prices in all our segments, and at the same time, we have increased market share since November. This indicates we are on a positive trend in market share. It seems that the entire industry has increased prices in the last month.

Operator, Operator

We'll give another few seconds for any additional questions to come in. Okay. It looks like we have no further questions at this point. I'll pass the line back to the CCU team for the concluding remarks.

Felipe Dubernet, Chief Financial Officer

Thank you, everyone, for attending this conference call. In the last quarter of 2022, we still suffered from the impact on our costs and expenses from negative external effects as well as high comparisons in terms of volumes and financial results. However, as I said, against previous quarters, we are experiencing sequential improvement. We are entering 2023 in good shape regarding prices, business scale, and brand equity. The HerCCUles 2023 plan will be the key driver to recover profitability. Finally, I would like to take this opportunity to thank all CCU employees for their effort and dedication during what was a particularly challenging year. I am confident that we will continue putting all our effots into recovering the path of profitable and sustainable growth. Have a wonderful day.

Operator, Operator

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