Compania Cervecerias Unidas, S.A.

Good day and welcome to the CCU's 3Q22 earnings conference call. Today's conference has been recorded. At this time, I would like to turn the conference over to Claudio Lajeras, Head of Investor Relations. Please go ahead, sir.

Welcome, everyone, and thank you for attending CCU's 3Q22 conference call. Today with me are Mr. Felipe Duvernet, Chief Financial Officer, and Mr. Carlos Anvanter, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated third quarter 2022 results. Felipe will now review our overall performance, and then we will move on to a Q&A session. Before we begin, please take note of our cautionary statements. 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. This statement should be taken in conjunction with additional information about risks and uncertainties set forth in CCU's annual reports 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 Mr. Felipe Duvernay.

Thank you, Claudio, and thank you all for joining us today. In the third quarter of 2022, we continue to face an adverse macroeconomic scenario which negatively impacted our financial results, particularly in Chile, where we also have a challenging comparison base against 2021. In terms of financial results, EBITDA contracted 33.4%, the later fully explained by the contraction in the Chile operating segment, while the international business and line operating segments improved their financial results. EBITDA margins decreased from 16.3% to 9%. indicating that our revenue management efforts and efficiencies have not been enough to offset three main external effects. First, the depreciation of our main local currency against the U.S. dollar, impacting our U.S. dollar denominated cost. Second, higher raw and packaging material costs. And third, other costs and expenses of pressures associated with an accelerating inflation in our main geographies. In line with this, net income totalized a gain of $17,226 million, a 59.1% drop caused by a lower operational result and a greater loss in non-operating results driven by higher net financial expenses. In this difficult business environment, we would like to mention that our long-term business fundamentals remain strong. Based on, first, a solid business scale, as we decreased slightly our volumes by 2.8% in the third quarter. However, we grew 16.4% versus 2019. Second, a stable, growing market share in our main categories. And third, a robust brand portfolio sustained on a constant improvement in our brand equity. We are focused as a company on recovering our financial results. To achieve this, we launched across all our business units a plan called Hercules 2023, aiming to recover profitability, especially in Chile, encompassing six pillars. First, to maintain our business scaling. Second, revenue management efforts. Enhance the CCU transformation program to deliver efficiency gains in cost and expenses. Four, focalize and reduce capex together with optimizing working capital. Fifth, focus on core brands and high volume margin innovations. And sixth, continue to invest in our brand equity. as it is crucial for our long-term sustainability of the business. As mentioned above, the Chile operating segment has been the most affected by the adverse macroeconomic scenario and a weaker consumption environment. Our top line was flat due to 4.8% growth in average prices, explained by revenue management initiatives partially offset by a negative mixed effect in the portfolio, while volumes declined 4.5%. Gross profit contracted 16.8%, mostly caused by a 20% devaluation of the Chilean peso against the U.S. dollar, affecting our U.S. dollar denominated cost and cost pressure from higher prices in raw and packaging materials. NSMDNA expenses grew 8.3%, and as a percentage of net sales, increased 261 basis points due to expenses pressures coming from high inflation and oil prices. In all, EBITDA decreased 51.1%. In international business operating segments, which include Argentina, Bolivia, Paraguay, and Uruguay, Net sales recorded a 25.8% rise as a result of an increase in average prices in Chilean pesos, while volumes contracted 1.3%. The better average prices were most explained by revenue management initiatives in all the geographies. Gross profit expanded 28.9%, and innocent DNA expenses as a percentage of net sales were flat, due to efficiencies that compensated high inflation and other cost pressures. Altogether, EBITDA increased 16.9%. In the wine operating segment, revenues were up 19.8%, mainly explained by a 19.1% growth in average prices, as volumes increased 0.6%, the later driven by exports and the Argentina domestic market. The higher prices in Chilean pesos were mainly explained by a positive impact on export revenues from the depreciation of the Chilean pesos versus the U.S. dollar and revenue management initiatives in our domestic markets, which permitted us to partially compensate higher costs in packaging materials and inflationary pressures. Consequently, gross profit expanded 17.3 percent, MSMDNA expenses grew 24.1 percent, and expansion as a percentage of net sales, increased 85 basis points. In all, it expanded 9.9%. In Colombia, our joint venture to produce and distribute beer and malt in Postobón top-line rose over 30% in Chilean pesos, driven by both volume and average prices growing double-digit. The late debt due to the implementation of revenue management initiatives. Financial results were similar from last year due to strong cost pressures and the devaluation of the Colombian peso against the U.S. dollar. In Argentina, our water business with Danone showed strong top-line goals, led by volume and prices, allowing a recovery in its financial results. Now, I will be glad to answer any questions you may have.

As a reminder, participants, if you would like to ask a question or make a contribution to today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. We'll pause for just a quick moment to allow everyone an opportunity to signal for questions. We'll take our first question from Henrique Brustolin from BPG. Your line is open. Please go ahead.

Hello, Felipe. Hello, Carlos. Two questions from my side, both of them in Chile. The first one, if you could comment a little bit on how margins evolved throughout the quarter, because we see some of these cost pressures declining. So just to get the run rate that you were at the end of the Q and how you think about margins going into Q4 and 2023. And the second one, and a little bit related to that, if you could comment a little bit on your price hikes on the quarter and on the year so far. How much more do you expect to hike prices to offset cost pressures or if the levels that you have right now are already, you know, good enough to cope with that? And in terms of the mix that you mentioned had a negative impact on prices, if you could give a little bit more color on what was this mix impact in terms of alcoholic and non-alcoholic performance and also if there was some consumer trade-down in those categories. So these are the two questions on my side.

Okay. Good morning or good afternoon, I don't know where you are, Enrique. Thank you for your question. Regarding your first question, yes, absolutely we are not happy with the margins that we have in quarter three. So because at the end we have two things that are impacting the margins. So on the one hand is the right-on-go un-packaging material costs, especially linked to the U.S. dollar, because on quarter-on-quarter, the devaluation of the Chilean peso against the U.S. dollar was 20%. So we suffered from especially high exchange rates in quarter-three, impacting on a lot of people. You are right in saying that some cost pressures are easy, especially because of some drop of commodity prices. especially maybe we will be profiting more, for example, in aluminum. In aluminum prices, of course, we are seeing this, but this has been somewhat compensated by this devaluation trend that we had during the quarter. But that's right. We could see in the cost side a better picture in the coming future. Steel exchange rate remains something very volatile. we practically reach, beginning of October, 1,000 pesos per US dollar. Today it's 900, but it's very volatile, as you will understand. But we will profit certainly from commodities. Although we have a little bit high level of some raw materials that we take some risk, to avoid risk of supply, especially mold and resin, but they will be an issue certainly during the upcoming summer. But the key question, the second aspect that is important is the price hike. And you are right, we, especially in all categories, we have been raising prices. Some of them are a little bit more ahead, for example, non-alcoholic or liquors, others a little bit behind inflation, and certainly also affected by mix of beer. So in this aspect, what I can say is that in terms of beer, after September, after we published the result of September, because it's public, we did the prices increase in both traditional trade and supermarkets from October, 1st of October, and a new price increase now in November. So we increase in the range of 5% to 7% the prices in October, and again an additional 5% in November in the year. And in the same case, in October, in non-alcoholic, we increased in the rate of 5% across all the channels in non-alcoholic. So we had a certain number of price increases that somewhat were jeopardized, as I have stated, by mixed effects, but we continue with price increases now IN OCTOBER AND NOW EARLY NOVEMBER. SO THIS CERTAINLY WILL PROJECT, WE EXPECT TO PROJECT A BETTER MARGIN PERSPECTIVE FOR THE UPCOMING QUARTERS. BUT I CANNOT BE SPECIFIC ON HOW MUCH BECAUSE IT WOULD DEPEND ALSO IN VOLUMES, IN INVENTORY DEPLICATION OF RAW MATERIALS. SO THERE ARE MANY VARIABLES THAT IS DIFFICULT AND WE NEVER DO A FORECAST. BUT CERTAINLY THE INTENTION to recover the results. And we are completely in line with this. Regarding the mix between alcoholic and non-alcoholic that you asked for, as you know, the comparison against 2021 is very difficult because it was a very unusual year with the liquidity of the consumer given the pension fund withdrawal and the government aid. was injected a lot of money to the consumption. But what I can say that if we compare the volumes against 2019, that is a better reference for the quarter, both alcoholic and non-alcoholic are in the same line, about 20% growth in terms of OF VOLUME. SO THAT IS A KDR FOR THREE YEARS OF ABOUT 6%. SO THERE IS NO BIG DIFFERENCE. HOWEVER, WHAT I WOULD LIKE TO MENTION IS THAT ESPECIALLY IN ALCOHOLIC CATEGORIES, OF COURSE, WE REACH A VERY HIGH PROPORTION OF PLENIUM PRODUCTS BEGINNING OF THIS YEAR. AGAIN, TO MENTION THAT FOR MORE LIQUIDITY OF THE CONSUMER, CONSUMER MORE EXPENSIVE PRODUCTS AT THE BEGINNING OF THE YEAR, AND THIS HAS BEEN STABILIZED OR HAS BEEN DECREASING IN THE LAST TWO QUARTERS. HOWEVER, AT A HIGHER LEVEL THAN THE ONE WE HAVE IN 2019. I HOPE I ANSWERED YOUR QUESTIONS.

We'll take our next question from Carlos Laboy from HSBC. Your line is open. Please go ahead.

Yes, thank you very much. As a category leader, can you share with us some insights on the timing of waiting until October and November for these price increases? I'm sure you probably wanted to take them earlier on beer. And as a category follower in soft drinks, Again, it looks like you're playing catch-up to much earlier price increases by the Koch system. Why wait on that one as well?

It is public that competitors suffer from the same cost pressure than us. And this has been published two weeks ago in the results, and this is public. Of course... the prices increases we do by ourselves, of course, and we do it independently, our revenue management efforts. So far until October, what I can say is that we, along with the prices increases, we have maintained our market shares. So that indicates that the whole industry increased prices because we suffer from the same COST PRESSURE. THERE IS DIFFERENCE BETWEEN TALENT, SKUs, BUT THIS IS MORE RELATED TO A PRICE ARCHITECTURE OR A REVENUE MANAGEMENT. ALSO, THERE ARE SOME INERTIA OR SOME CARRY OVER OF SOME PROMOTIONS THAT COULD AFFECT THE MARKET PRICES. BUT AT THE END OF THE DAY, THE INFLATIONARY PRESSURES, THE DEVALUATION PRESSURES ARE There are some commodities that would help a lot, such as aluminum, but there are others that would not help, such as, for example, fruit pints or grains. But although they are at a lower level right after the Ukrainian war, they are at a much higher level than we had a year ago. Okay, Carlos?

Thank you very much. Do you expect volume declines? in beer and soft drinks on the back of these price increases?

Look, this is a very important question. Because all economists are saying that, especially Chile, we can talk of Argentina separately because it's a different, let's say, a different analysis. But in terms of Chile, For many, many years, it's the first time we are suffering from both phenomenons. One, high inflation. China used to have something like between 3% to 3.5% inflation. And recession, economic recession. So this is what is forecasted for 2023. So we cannot predict how the consumer would evolve and how much would be the elasticity, but also in combination with the recession. As I mentioned in the previous question, our TDR, or our average growth in the last three years, has been 6% in Chile, which is very good, Carlos. We'll move to, I would expect to move to a lower rate, let's say, in 2023. Let's say low single digits. but we have not faced, at least in the last 25 years or 30 years, 25, 20, 25 years, at the same time, a recession and an inflationary context for the country. So how much would be the volume or the volume drop that we could face given the crisis increases that we are executing, we are still too early to call, I would say, at least. But certainly, I think a good perspective would be to maintain in 2023 a lower rate than the one we have in 2022. As I mentioned, three-year growth, 6% is very good. It should be more more close to no single digit. But we don't know. We haven't faced this scenario before in Chile. What we are sure and committed is to recover the margins through revenue management efforts and also efficiencies, but we can talk later on. But first, we need to fix the direct margin, okay, or the gross margin.

Okay, Carlos? That's really helpful. Thank you.

One second, ladies, gentlemen. Please press star one for cue to question. We'll pause for just a moment to allow everyone an opportunity to signal for question. We'll take our next question from Tiago Bartolucci from Goldman Sachs. Your line is open. Please go ahead.

Yes. Hey, guys. Good afternoon, everyone. Thanks for opening up for questions. For sure, part of the story on margins recomposition is about a better momentum in Chile and also pricing. But I guess SG&A and efficiency will also play an important role going forward, right? So you mentioned the new step of your efficiency plan for next year and highlighted a number of pillars in order to extract better efficiency. I would just like to understand where you see low-hanging fruits eventually to capture going forward, and how these efforts eventually to balance a little bit more SG&A will cope with the necessity to keep up investing in brand equity, and what is the opportunity to capture from better efficiency going forward? Thank you very much.

Hello, Tiago. Nice to see all of you. of course this is the third pillar is our transformation plan where we focus equal we are focusing in in other clusters and experiences so in in in fact we as as we have been carrying out since 2015 the former program that we call it financial ccu and then we move to the transformation this year, but now we launched a more comprehensive plan that we call Plan Hercules. And one of the key aspects is efficiency. Of course, we are working in many fronts on that, from procurement, manufacturing expenses, distribution expenses, and DNA, or general administrative expenses. So in order to come back to the levels we have previously in terms of expenses and sub-percentage of net sales. In fact, the Salencia CCU plan since 2015 until last year was very successful, reducing 1,000 basis points as a percentage of net sales, our expenses. However, this year, given the inflationary pressures and that we have not been able yet to pass all the prices increases, especially until quarter three, our indicator of expensive percentage of net sales is much higher than last year. As you mentioned, we need to focus on real efficiencies and not jeopardize or not decreasing our support to the brands, because these are key for the sustainability of the business. So we will do efficiencies not by cutting marketing. We will preserve our marketing rights, focusing on maintaining or gaining first preference of our brands. I can enter in more detail if you want in terms of we have many initiatives. We are especially – especially we announced the new electricity contract with a much convenient, let's say, energy – electricity energy cost for next year, also – and this also encompasses using 100 percent renewable electricity power. It's a win-win between an economic aspect but also an environmental aspect.

No, this is clear. If I may just follow up on this, and this is just to understand the ambitions that you guys have for next year, right? Would it be fair to assume that we should be targeting G&A still growing in nominal terms but eventually less than net revenue, or this could even be more aggressive in terms of implying a nominal decrease in our total S&J in trillion pesos terms?

No, we don't do forecasts at that level, but we expect, so as of today, so for example, if you saw in third quarters, our MS&DMA, but along with, but our manufacturing space has been increasing a lot, especially due to energy costs, gas and electricity this year. So we are a little bit far away from inflation when you mix both expenses. We are practically in line with inflation. For next year, inflation should ease a little bit. The comparison for price will be beneficial. So at the end, you know, a firm thought would be in line with inflation. We are forecasting inflation for next year from January to December 5.3%. But essentially, we want to beat inflation somewhat through the efficiency program in order to have this. But for us, the main relevant indicator is efficiencies – excuse me, expenses as a percentage of net sales.

That's super, super clear. Thank you very much.

We'll take our next question from Philippe from Scotiabank. Your line is open. Please go ahead.

Thank you guys for taking this space for questions. Maybe just one on my end, a couple of the other ones I had have been asked, but maybe if you could give us a little detail on Columbia, which seemed to have a good performance, both on volume and on pricing. On the volume specifically, Are you getting this by expanding your territory, or are you still focused on the same area and you're actually capturing share? Or maybe it's a mix of both. Just love to see if you can give us some color on that performance. Thank you.

Thank you, Felipe. First of all, in Colombia, I think along the quarters, we have a tough quarter two, but a better quarter three, I would say. But what I'm really delighted was about our brand preference or brand equity in Colombia that continue to increase, because this give us the fundamental of the business, especially the development of the Andina brand, as you know, is our main thing, right? Without having the brand in the heart of the consumer, it's difficult to achieve market share results because we have the excellent distribution network of Postoboni. We have a good execution of the team, but we need the brand preference, especially in these times. So we reach a new record in brand preference that is much higher than our market share, which is very good because at the end, our brands have more potential in order to capture more market share. This is in the commercial front, so I would say we are happy with that. On the other hand, we have margin pressure in Colombia. Today, the exchange rate is 5,000, so the devaluation in Colombia in quarter three was high, so the devaluation was 14%, but in Q3 was 4,372, but nowadays it's 5,000, and we are worried about that. So new revenue management efforts should be done certainly in Colombia to compensate the profitability. So that is very important. Regarding the territories, so, yeah, we have a special priority, especially in returnables in Cundinamarca, where our plant is. But given the distribution network of Postobon, we are present in all the territories, in all the Colombian territories, with a different proposition in the portfolio. So that is the color I can give you about Colombia, Felipe. Okay.

That's great, Collier. Thanks. And maybe if I can do a follow up, I wanted to ask you about hedging, right? You guys are notably less intensive hedgers or non-hedgers at all when you compare to your other competitors, right? And Dina does a little bit. It doesn't hedge a lot, but it does a little bit. But then you also have Omdiv, which is much more active in hedging. Does that create a problem with the timing of price increases?

So, you know, competitors also have increased prices, although they hedge. So, hedge is temporary. It's a temporary effect. Because if I would hedge in September or beginning of October, I would hedge a very high U.S. dollar, and now the dollar is 900. So, at the end, the policy of the company remains the same. We only hedge or protect our balance sheet. We do not hedge our flows. and the policy remains the same.

Okay, understood. Thank you.

There are no further questions on the line. I will hand over the call back to CCU. Please go ahead.

Thank you, you all, for attending this conference call. The current adverse economic scenario, as I highlighted, where we combine at the same time inflation and recession, especially in our main operating segment, continue to negatively affect our results and profitability in Q3 2022, especially in our largest operating segment, Chile, as I mentioned. Nonetheless, we remain optimistic for the future as the key long-term fundamentals of the business scale Market share and brand equity remain strong. We are focused as a company on recovering our financial results by executing Hercules 2023, our six-pillar strategic plan, making profitability recovery our priority. Thank you, you all, and have a wonderful afternoon and evening.