Compania Cervecerias Unidas, S.A.

Good day and welcome to the CCU's fourth quarter 2020 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Claudio Lazaras, head of investor relations. Please go ahead.

Welcome, everyone. I'll thank you for attending CCU's fourth quarter 2020 conference call. Today with me are Felipe Duvernet, Chief Financial Officer, and Nicolás Novoa, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated fourth quarter 2020 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 statements. The statements made in this call that relate to CCU 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 risk and uncertainties set forth in CCU's annual report in Form 20F filed with the U.S. Security 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 Duvernet.

Felipe Duvernet Thank you, Claudio, and hello to everyone, and thank you for joining us today. In 2020, we faced a particularly challenging year due to the COVID-19 pandemic. To handle this, we implemented a regional plan with three priorities. The safety of our people and the community we interact with. Secondly, operation continuity. And thirdly, financial health. This allows us to continue operating and supplying our products to all our clients and consumers. According to this, we put in place a strategy which aims to maintain business scale and then gradually recover profitability over time by implementing revenue management initiatives and efficiencies. In terms of volumes, in 2020, we grew 2.2%, reaching 30.7 million hectoliters. in spite of the strong negative impact in our volumes from the pandemic between April and August, showing a V-shaped recovery throughout the year, as follows. An expansion of 6.4% in the first quarter, a drop of 12% in the second quarter, a slight contraction of 1.8% in the third quarter, and a strong growth of 10.6% during the fourth quarter of the year. Regarding financial results, EBITDA dropped 11.7% and EBITDA margin decreased from 18.4% to 16%, mainly due to negative external effects from the sharp depreciation of the Chilean peso and Argentine peso against the U.S. dollar and the impact from the pandemic in high-margin consumer locations. These effects were partially compensated with revenue management initiatives, efficiencies from the Excelencia CCU program, and lower cost in raw materials. At net income level, we decreased 26.1%. In regards to financial health, we kept our net financial debt under control, decreasing against last year. During the fourth quarter, the expansion of 10.6% in consolidated volumes was driven by an 11.7% jump in the Chile operating segment, 8.3% increase in the international business operating segment, and 10.9% rise in the wine operating segment. The higher volumes were the result of a solid commercial and operational execution, which allowed us to respond to a strong demand recovery. In terms of financial results, EBITDA increased 5.7%, and EBITDA margin improved from 20.7% to 21.1%. The higher EBITDA was mainly explained by the volume growth mentioned above, revenue management initiatives, and efficiencies from the Excelencia CCU program, partially offset by negative effects related with the currency translation of our results in Argentina, according to the hyperinflation accounting. MS&D&A expenses up percentage of net sales, improved 377 basis points. Net income grew 0.2%, including a non-recurring negative effect explained by an impairment loss related to Bolivia and property impairment losses. Excluding these two impairments, net income would have expanded by 9.8%. In the Chile operating segment, this quarter, our top line expanded 19.8% due to an 11.7% growth in volume and 7.3% higher average prices. The strong performance in volume was driven by all main categories, in line with lower restriction and a more positive consumer environment, along with gains in market share. The higher average prices were explained by revenue management initiatives and positive mixed effects. Gross margin contracted 357 basis points as a consequence of the negative impact of the pandemic in high-margin consumer locations and higher manufacturing costs. MS and DNA expenses as percentage of net sales improved 322 basis points, in line with cost control initiatives through the Excelencia CCU program. In all, EBITDA increased 16.1% and EBITDA margin dropped from 25% to 24.2%. The international business operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, reported 8.3% higher volumes and 33.8% drop in average prices in Chilean pesos during the quarter. The lower average prices were mainly related with negative currency translation effects in Argentina applying hyperinflation accounting, while prices in local currency increased thanks to revenue management initiatives. Gross margin contracted 54 basis points. MS and DNA expenses as percentage of net sales improved by 385 basis points due to efficiencies from the Excelencia CCU program. Altogether, EBITDA decreased of 17.6%, but returned to positive ground after two negative figures in the second quarter and third quarter of 2020. EBITDA margin increased from 16.1% to 18.5%. The wine operating segment posted a 4.5% rise in revenue, driven by a 10.9% expansion in volumes, as average prices contracted 5.7% during the quarter. The volume expansion was driven by the Chilean and the Argentine domestic market, while exports decreased. The lower prices in Chilean pesos were mainly a consequence of a negative mixed effect from the higher growth in our domestic markets. Gross margin decreased 555 basis points, mostly reflecting a higher cost of wine. MS and DNA expenses as percentage of net sales deteriorated by 422 basis points, mainly due to higher temporary marketing expenses. In all, EBITDA contracted 36.6% and EBITDA margin decreased from 23.9% to 14.5%. In Colombia, where we have a joint venture with Postobon, in 2020 we reached more than 1.5 million hectoliters, posting an annual expansion of 21.2% while the industry contracted. This positive performance in spite of a challenging scenario allow us to practically double our market share in 2020. The consistent positive trend in Colombia is the consequence of a continuous improvement in brand equity, distribution and sales execution. In terms of financial results and in line with a greater business scale, we reach positive EBITDA during the second half of the year. with four consecutive months with positive EBITDA since September. Now I will be glad to answer any question you may have.

If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open Please state your name and company before posing your question. Again, that is star one for questions. We will take our first question. Please go ahead.

Lucas Ferreira from J.P. Morgan.

Hello, Lucas.

Hi. Good morning, everybody. Good afternoon. Thanks for taking my question. I would like to understand, first of all, a bit better the scenario in the market in Chile. So if you guys could provide us more details on the beer market. You guys gained market share. Which were the segments of the market that grew the most during the fourth quarter? And where, I mean, you gained most of this market share in any specific channel that was stronger in the fourth quarter. And what can we expect for 2021 for the beer market, considering, in one hand, Chile is vaccinating super fast. So the reopening of the economy could be also fast. On the other hand, there are no more, let's say, AFP withdrawals. So what was, in your view, the effect of these withdrawals in the end of last year? So how do you see the market growing in 2021? And my second question, guys, is on the cost front. So you're seeing, I guess, most of the commodities you know, skyrocketing, I would say aluminum, sugar, most likely PET considering oil prices. So I wonder if you guys can give us also an outlook of what's your expectation, your budget for average cost in 2021. Thank you very much.

Hello, Lucas, for your questions. First of all, about the market in Chile, specifically you asked about beer. Yes, in fact, we experienced a very good growth during the fourth quarter. And I would say along the year, the beer category has been very resilient. But this resiliency was also a trade-off between consumer locations and packaging. Answering specifically your question, in terms of segment growth, definitely one-way packaging grew more than returnable packaging, and this has to do with the closure of the on-premise channel. So we experienced high growth in cans and also in one-way long-neck bottles. Also, at the end of the year, we saw a good performance in premium, growing all the premium brands, so also put a little bit pressure on supply. But this is to give you more or less what happened in terms of the segments. In terms of channels, of course, the on-premise channel was reused, and gradually recovered towards the end of the year once the restriction is, but is not fully recovered because still there are restrictions, especially on weekends during December in Chile, and also because of the curfew. So the on-premise didn't recover at the level it has a year ago. In terms of other channels, I would say that the off-premise channel has a tremendous growth compared to all the other channels. It grew more than supermarkets, and this trend has been continuous throughout the year, but especially in the last quarter. So in all, we saw a very bullish industry in beer in Chile, which is good. To give you an outlook for 2021, first of all, we don't do forward-looking, but still we have uncertainties. You mentioned that the vaccination, and we are very happy about that, in Chile is going really well. It's a benchmark at the world, if we saw the rest of the world, and especially in Latin America. However, we are optimistic, but still there are a lot of uncertainties that we need to, that is difficult to predict. So, so far, I would say we have had a good start in 2021. So a continuous trend in terms of volumes. You mentioned that we will not have the, maybe there will not be another allowance from the pension funds. It's a bad policy, we know. But we don't have exact calculation what does mean in our categories. But it certainly has played a role in the consumption in the last quarter. So in all 2021, we see it with a lot of hope, given the vaccination, given that maybe we'll have less restrictions in that way. And also maybe because also the Chilean economy will do better than last year, certainly, and supported also by commodity costs, such as copper. And Your question about cost front, yeah, we don't have the perfect word. The perfect word would mean, you know, lower exchange rate and lower commodity price. It's not the case. We have now a lower exchange rate, but a higher commodity price in U.S. dollar. We don't give forward-looking in terms of prices what we have considered for budget, but nowadays are more than what we have. On one hand, we have a higher commodity price prices that we thought two months ago, but also a lower exchange rate that should compensate that. In all, I'm more optimistic on that front because the exchange rate weighs much more than the commodity prices. Okay, Lucas.

Thank you very much. Yes, thank you very much.

We will take our next question. Please go ahead.

Caller, you may be on mute.

Marcella Hecker, Credit Suisse.

Hello, Marcela. How are you?

Hey. Yeah, all good here. Thank you for taking my question. I have two questions about Colombia, if I may. First, could you comment if the 1.5 million hectoliters volume in the country is all beer? And if not, how much is beer only? And if you could tell us what market share this volume represents. I understand that you almost doubled your share recently. in the region throughout 2020, but could you give us some perspective of what is your current share level there? And finally, you are already delivering positive EBITDA in Colombia, right? So do you have any visibility about a net income break-even? Thank you very much.

Thank you, Marcela, for your question. Yes, we are... Although 2020 was a very difficult year in Colombia, especially in quarter two due to the heavy restrictions, what we saw is a favorable, let's say, channel conversion that helped us a lot. And as a consequence, we were able to expand our volumes more than 20%, reaching 1.5 million hectoliters, although the base of 2019 was the first year of the launch of our mainstream brand, Andina. Regarding in Colombia, we sell beer and malt through the brand Natumalta, but about 90% of the volumes is beer. But we were especially delighted with the success of our Andina brand, that contributed a lot to gain my cashier, and also a very good growth in Heineken, especially empowered by the launch of Heineken returnable bottles in the middle of the year. So regarding share, we don't disclose the numbers, but we are talking about mid-single digit, a little bit more than mid-single digit in terms of market share, what we reach on average during the year, but every month growing. Regarding the financial, you mentioned correctly that we delivered positive EBITDA in the second semester. At the end, in terms of net income, it depends on many factors, such as exchange rate, commodity cost, and also competition. But we think this year, in the big month, we will be approaching the break-even on net income. But we don't give a guidance on specifically net at which time, but we are moving in the positive direction, I would say.

That's really helpful. Thank you so much, guys.

Once again, if you would like to ask a question, please press star one. We will take our next question. Please go ahead.

Hi, guys. This is Mohammed at Foiston. Thank you very much for taking my question. Hello, Mohamed. Hi. Hope you guys are all well. I have two questions. One is on COGS inflation specifically in Chile. The number I see here is I think almost 12 or 14% for the year. Let me see, 12% COGS per hectolitre increase in the year last year. Can you give us any color on how much of it was mixed versus FX? And then the second question I have is on CapEx. How much was the CapEx in 2020 and what should we expect in 2021? Hello?

Thank you, Mohamed. I hope you are well. So let me touch on the cost inflation question, and then I will ask Nico Novoa to answer the capex question. So in the-regarding cost inflation, you were right. It was influenced by two main effects. One effect was the exchange rate. As you know, the Chilean peso throughout the year faced the evaluation of the currency, so of about, let's say, 13%, and our raw material costs are, I would say, 80% linked to the U.S. dollar. So that's the first effect. Also, you pointed out correctly, the mix also has an effect because, as I mentioned in a previous question, we are a switch from returnable packaging that has less cost of goods to one-way packaging where you have a higher cost of goods. So this also has an influence. But the main influence was certainly exchange rates. That started to ease very positively in quarter four, where the exchange rate compared to the same quarter of last year was practically flat, only minus 1 percent. On the other side, what also we mentioned in the previous question, we have rising commodity costs. But in all, it was more favorable, and especially I hope this quarter would be better. So that was the reason of cost inflation. Now I hand over to Nico, your question regarding CAPEX.

Hi, Mohamed. How are you? Regarding to CAPEX, this year we have a CAPEX around 122,000 million pesos, which is pretty much our maintenance CAPEX. If you look at our depreciation, It's around 110,000 million pesos. So it's more like maintaining capex related with the investment that we need to keep selling and the trade. Also, that includes, obviously, investment in capacity, especially the investment in capacity that we started in Argentina. If we look forward for the next year And related with this volume growth that we are seeing in Argentina and especially in Chile at the end of the year, we are seeing a little more CAPEX than the CAPEX that we saw this year, more related with this need that we are going to need a little more investment in capacity in Chile and Argentina. We are going to disclose those numbers in our annual report on 20F, but that is pretty much the thing that we are seeing regarding to CapEx.

Okay. Thank you very much, guys.

We'll take our next question. Please go ahead. Carlo, you may have us on mute.

Yes, this is Carlos Laboy. Hello, Carlos. How are you? Hi, how are you? I was hoping that you could give us some more insight on Colombia, maybe around three areas. One is, are you done with your geographic coverage rollout in Colombia? Another question was, what can you tell us about repeat consumption? for your core brand. And lastly, what can you tell us about channel mix and the price for your brands? You had said that you'd had a positive channel conversion. What does that mean? What does your channel mix look like right now and the pricing?

Yeah. So, first of all, we are in other countries, but we have a core area around the brewery where we have all the portfolio, which is the Bogota region. So, we have a higher share in Bogota. However, remember, our beer business in Colombia is a joint venture with Postobon, which is the main non-alcoholic beverage operators. So we use the distribution of Postobon to distribute our products. So we have a full coverage of the country. However, we have a core area that is, especially with returnable packaging, which is because Colombia, the proportion of returnable is much higher than one way. But in the Bogota, we have a higher presence Answering channel mix, I would say that during the pandemic, the on-premise channel fall down, but it started to recover. My comment was on that sense. And as we are new in the market, we are a stronger presence in supermarket that increase more the sales, I would say. However, being said that, we are increasing our distribution day by day in the on-premise channel. But specifically in the pandemic, supermarkets grew more. That's a little bit the answer.

Hello.

We will take our next question. Please go ahead.

Hello. Thanks for taking my question. I have a couple of questions. The first one is regarding transport expenses, which was one of the one important saving that you showed in your in your present results and it's uh an expense that i suppose that that is also a variable but i would like to know if there's maybe in any commodity impact or maybe a strategy a strategy impact on your on your logistics also can you give us a a little bit of outlook in argentina you you're showing more stable margins in these results after having very important decreases in margins and you have been having a catch up on that front so I'll be glad if you can give us some explanation on that and maybe an outlook on what are you expecting in the upcoming months and also finally regarding the wine business also there was a negative impact on cost and so It would be good to know if you will try to manage this by revenue management and if you are seeing possibilities of countering these profitability pressures in your markets. Thank you.

Thank you. Can you give me your name, please?

Diego Woodman from BTE.

Diego, hello, how are you? Hope you are well. Okay, thank you, Diego. Okay, Diego, yeah, you asked specifically, I think about transport expenses in the distribution, domestic distribution side, right? Or you asked about worldwide transport expenses, because it's...

regarding your businesses, as we see the... Okay.

On one hand, you have the inbound transport of raw materials and things that are experiencing higher costs, and this is particularly with China. So, in terms of domestic, we are linked to variables such as oil price in Chile, that on one hand, We do have, you know, during quarter four, you know, relatively good prices in oil compared to the same quarter of 19 and also decreasing exchange rates. So it was somewhat favorable. However, now oil prices would certainly increase given this bullish commodity scenario, I would say. But along with this helped us a lot, specifically because we have a higher volume, so we needed to hire more fleet, especially in the last quarter. Jumping to Argentina now, yes, you are right. We experienced that big shape in Argentina in results. We had a very tough year, especially in second and third quarter with negative EBITDA, non-cash generation. So at the end of the year, it started to improve a lot. And I would say this is very encouraging towards 2021. We did a lot of revenue management initiatives while the volume has not collapsed. In fact, we have had a very good volume in quarter four. And we had a very good start in January 2021 also, where we were able to increase prices, which is good news for Argentina. So we are more optimistic, let's say, nowadays in Argentina as we were last year ago. Wine, in terms of wine, we are suffering from cost pressures. cost pressures of the cost of wine, given the 2020 harvest that was not famous. And then now we had especially bad weather during February that affected also, that would certainly affect the 2021 harvest that now is starting. So the only way to compensate that is through revenue management. It's more easy in the domestic side of the business, let's say in Chile, rather than the export markets. And also this business would be on the other side of the other business, by, you know, a weaker U.S. dollar. So the only way to compensate that is through revenue management, wherever we can, and also efficiencies.

Okay, Felipe, thank you for your answers.

Once again, that is star one for questions. Please state your name and company before posing your question. We will take our next question. Please go ahead.

Hi, Felipe Nicolás. This is Felipe Cruz from Scotiabank. Most of my questions have been asked, so a couple of follow-ups, really. You talked a little bit about Colombia. I was wondering if you could give us some color about how brands are doing, how Ambina is doing versus Heineken. and how receptive the consumer has been to each one of those. I see you've gained market share as well, not really expanded the region. Can you talk a little bit about how much you think that's because of the channel changes and how much it gains within that same channel? And then my second question, you also talked a little bit on Argentina. Can you talk a little bit about how price controls have evolved and how conversations with the government are going? What do you expect for 2021? Should you be able to increase prices with inflation or above, or do you expect a little more government intervention on that side? Thank you.

Thank you, Nicolas, for your two questions. Regarding Colombia, as I mentioned, we saw very good performance on Heineken, especially on the premium side. This was a lot thanks to that we have expanded our portfolio. By being only in one-way packaging, we expanded to be in one-way packaging and returnable bottles. and also Andina is a brand where we are building brand equity, also expanded very well. Some of the explanation is channel, but also, you know, it's a business where we are, you know, building a new brand, such Andina, and this also has an effort in terms of a lot of potentials in gaining share by our brand equity. So it's not only channel. And in terms of Heineken, as I mentioned, is the expansion of the portfolio that helped a lot us to gain market share. So that's related to Colombia. Argentina, as I mentioned, we were able to increase prices in January. We were delisted from the Precios Maximus program. Beer was delisted from this program, and it was announced until the end of March. And this is the reason why also we were able to increase prices in January, which mean that we are step by step recovering the past profitability we had in the business. And you saw the numbers where as a whole, because we publish international business, but it's mainly Argentina is a significant portion of that, we were able to have, first of all, positive EBITDA, and secondly, a nice margin, EBITDA margin expansion from 16.1 to 18.5. And add to this also the price increase in January. It means that we are starting in a very good shape the year.

That's very good, Carlos. Thanks a lot.

We'll take our next question. Please go ahead.

Hi, this is Barbara Einstein with Itaú. Hi, Felipe. Hi, Nicolás. Everybody there. I just wanted to see if you could comment on the news published last week that some smaller mom-and-pop stores presented a complaint with Fiscalía Nacional Económica on disruptions on supply and low inventory levels in their channel versus supermarkets. It caught my attention because, as you have commented in previous occasions, the profitability of supermarkets and mom-and-pop is quite different, and therefore it seems a little bit surprising that there is a lack of inventory there. Can you comment on this, please? Thank you.

Hello, Barbara. I hope you are well. Yeah, I will not refer specifically to that claim because we do not have at the moment any detail or any inquiry from the antitrust or the Fiscalía Nacional Económica at the end. And it was a complaint against the whole industry, not only us. What I can say is, you know, hard data. The off-premise channel during the last quarter, the quarter four, grew three times the supermarket channel. However, we need to recognize we have supply issues because we grew in beer double digit. Secondly, the mix has been throughout the year very affected by the pandemic, as I mentioned before, by, you know, a switch from returnable bottles to one-way packaging. And maybe if you saw international reports on the industry, there is a worldwide shortage on cans everywhere. This was one of the consequences of the pandemic. So a tight supply combined with higher growth in all the channels, in all the channels during the fourth quarter, but we don't have any. So the product we have is that the product we have for every shot. without any discrimination. And, in fact, the off-premise channel grew three times the supermarket channel.

Okay, so it seems to be more an issue that they are selling so much that it's impossible to keep up with the volumes that they sell.

Yeah, we had a strong volume during quarter four, along with supply issues that are evolving positively, but, you know, it's a very violent change of mix, along with very high sales.

Okay. Thank you very much for your answer.

Okay. Once again, that is star one for questions. We will take our next question. Please go ahead.

Yes, good afternoon. This is from Templeton. Hope you are all well. Thanks for the call. My question is, I apologize if this has been already answered. I had some communication problems that I would like to know your assessment of the agreement between Coca-Cola and Vina and Ambit, if you have any pressure on competition there or any new developments from that agreement. Thank you.

Hello, Santiago. I hope you too are well informed. Yeah, it's public that there is a distribution agreement between Andina and ABI. First of all, it validates our multi-category business model that CCU has been empowering, or let's say, in that model for many, many, many years. We think we need to continue doing what we have been doing, focusing on sales execution and brand equity. But, you know, it's too early to give any comment on that because the distribution has started in November. And in terms of market share, we haven't suffered in quarter for 2020. But we are prepared to do that. And we don't have any specific commentary on what they are doing.

Okay, thanks. Thanks a lot.

Once again, that is star one for questions. It appears we have no further questions at this time. I would like to turn the conference back to your host for any additional or closing remarks.

Okay, thank you very much to you all for attending this conference call. In 2020, we were able to protect our people, support the community, and continue operating in all the countries we operate while keeping the financial health of our company. At the same time, we protected our business scale by delivering volume growth and set the ground to recuperate profitability gradually over time through revenue management initiatives and efficiencies. Looking ahead, during 2021, we will continue to face a challenging and uncertain scenario. However, we are optimistic on that. In this context, we will keep focusing on the three objectives set for the pandemic, and we will double our efforts to recover profitability in the coming quarters. I would like to thank the effort and commitment of all CCU employees, which allow us to overcome a particularly challenging year in 2020. I am convinced that if we take care of each other and work united, we will emerge stronger from this difficult time to share together a better life. Thank you very much and have a very good afternoon.

That concludes today's presentation. Thank you for your participation. You may now disconnect.