Compania Cervecerias Unidas, S.A.

Ladies and gentlemen, thank you for standing by. Good day and welcome to CCU's fourth quarter 2022 earnings conference call on the 1st of March, 2023. Today's conference call is being recorded. At this time, I would now like to turn the conference over to Claudio Lazaras, the head of investor relations. Please go ahead, sir.

Welcome, everyone, and thank you for attending CCU's fourth quarter 2022 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 fourth quarter 2022 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 statement. The statements made in this code 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 risk and uncertainties set forth in CCU's annual report in Form 20-F filed with the U.S. Security and Exchange Commission and in the annual report submitted to the CNF and available on our website. It is now my pleasure to introduce Felipe Duermes.

Thank you, Claudio, and thank you all for joining us today. In 2022, we face 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 sharp negative external effects, coming from the depreciation of our main local currencies against the US 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 a historical brand equity level in our main categories 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 Hercules 2023, a recovery profitability plan which encompasses six pillars. Maintain our business scale. Second, strengthen revenue management efforts Enhance the CCU transformation program to deliver efficiency gain in cost and expenses. Focalize and optimize CapEx together with optimizing working capital. Focus on core brands and high volume marketing innovation and continue investing in our branding. 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 on prices which expanded in line with inflation and efficiencies in costs and expenses. From a quarterly perspective, in quarter 4, 2022, we continue operating in a tough economic environment which impacted consumption. Top line decreased 6.6%, driven by a 5.5% drop in volumes. However, 10% growth versus Q4 2019 and a 1.1% decrease in average prices in Chilean pesos. EBITDA contracted 21% and EBITDA margin decreased from 18.9% to 16%, the latter 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-operative results, mainly driven by higher financial expenses due to a larger debt. In terms of our segment, 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%. Mostly due, of course, we had a very high comparison base in 2021. EBITDA decreased 24.4% and EBITDA margin decreased from 19.4% to 14.2%. In international business trading segments, 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 they increased in local currency in line with inflation, while volumes contracted 1.1%. The growth against quarter 4, 2019, was 4.7%. EBITDA went down 19.7%, negatively impacted by the exchange rate translation effect in Argentina related with 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. 8.4% growth versus Q4 2019. As a consequence, Edipta improved 18.5%. Regarding our main joint ventures and associated business, in Colombia, where we produce and distribute beer and mof with Postobon, Top line growth almost 20% in Chilean pesos in 2022, 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 a recovery in financial results. Both JVs represented 7.4 million hectoliters as of December 2022. Now, I will be glad to answer any questions you may have.

Thank you very much for the presentation. We will now be moving to the question and answer part of the call. If you have any questions, please press star 2 on your keypad. That's star 2 on your keypad. Wait for your name to be called. If you are dialed in via the web, you may also ask a voice or a text question. We'll now give a moment or so for the questions to come in. Thank you very much. Our first question comes from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir. Your line is open.

Thank you, Felipe, Carlos. Thanks for the space. Let me start with the normalization of trends. 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 normalized, and 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.

Good morning, Felipe. Thank you for your question. What I can say is that we have experienced throughout the year in 2022, especially from quarter two, quarter three, and now quarter four, if you compare quarter four against the two previous quarters, we saw a sequential improvement in our results. Because, for example, in quarter two, quarter three, our margin contraction was for example at consolidated level 700 basis points and especially in Chile was a thousand basis points the contraction in margin in quarter two and quarter three. So this was the bottom in terms of bad results. What I can say is that in quarter four the deterioration of the margin was half of what we experienced in quarter two, quarter three, and especially in Chile. And so Chile has improved, is in the right frame to improve the margin. So as we said in previous calls, it takes time to recover the profitability, but all the actions are in place. So first prices, As you saw, especially in Chile, we were able to catch up inflation or mostly catch up inflation towards the end of the year. So that's good news. And on the other hand, we are a more favorable exchange rate in Chile. So that certainly should impact our cost base. Nevertheless, I think the big risk is about the industry volumes. While we are preserving or even growing Macashare, the last finals or the last measurement of Macashare at the end of the year and beginning of the year are very good for CCU, especially in Chile, in all the categories, beer, non-alcoholic and wine. However, we are seeing an industry deterioration. So at the end, we will see along the time sequential improvement as we experience in quarter four compared to quarter three in terms of our result. By saying that, although this world is very volatile, today we are experiencing, I don't know, a hundred pesos less exchange rate than quarter three, for example. However, the scenario is volatile. By saying that, I could say but all the structural actions are taken.

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

All of these, of course, we reach not only a very high comparison volume as we discussed several times in in 2021 especially because of the exceptional consumption growth that we experienced that year but also a high pre-immunization in many categories especially in in alcoholic products So today we are experiencing a decrease in terms of premium mix, going the consumer more to the mainstream brands. However, I would like that it's still much higher, the premium mix, than in 2019. So there is some sort of normalization or standardization. of that that we are experiencing. So this, of course, is also jeopardizing a little bit the price efforts. However, we are confident that it would stabilize along the year at a higher level than the one we had pre-pandemic. In terms of channel, I think you asked about channel, still the on-premise channel in Chile is less of what it was in 2019. So, it has not fully recovered. But I would say it has recovered, but not at the level of 2019.

Okay? Excellent. That's really good, Carl. Thanks for the space.

Thank you very much. Our next question comes from Mr. Lucas Ferreira from JPMorgan. Please go ahead, sir. Your line is open.

Hi, everybody. Thanks for the space to ask questions. I was just wondering if regarding prices, if you can get into more details, if there are new initiatives in places in the different markets. So is there something ongoing or any new price hike that you plan to implement in the next few months? if that's still part of this normalization we're going to see. And the second question is about the cost. So you mentioned the effects being helpful there to offset part of the costing impacts. But if you can comment on the raw materials, how you're seeing them, the numbers that we see in the fourth quarter, How much of the decline, for instance, in the aluminum prices we saw through the beginning of the second half of last year, how much of that is already in your cause lines, or if there's something else to come in the first quarter or the second quarter? Thank you.

Hello, Lucas. Thank you for your question. Regarding pricing, a big effort has been done, as we announced in previous calls, in quarter four. As you saw, especially in Chile, where we were behind in terms of prices, because in the other big markets, such as Argentina, we were all the time in line with inflation. But in Chile, we really catch up on the on the last quarter of the year, as you saw, the Chile operating segment price per hectolitre increased 12.4%, so practically in line with inflation. As a strategy, and one of the pillars of our EFULES plan, is to continue with our revenue management efforts. And this is not only price list, but also rationalised promotions, So, and also working a lot on pack mix price architecture in order to optimize our revenue predictor. So we continue this effort certainly. Regarding cost, it was very helpful. The ethics tell wins that we are experienced, because as I will recall you, 70% of the cost of goods sold are linked to the US dollar. So now if you compare Quarter 4 was 915 pesos per US dollar, and nowadays, or today, spot prices are close to between 800 and 830, as it has been in the last two weeks. So this is very good in terms of, let's say, easing the cost pressure. In terms of raw material commodity costs, aluminum prices are stabilized somewhat in $2,400 per... Thank you, Claudio, $2,300 per ton of aluminum. When you compare with the average of 2022, this is $400 less. So practically 15 or between 10, 10 to 15% of less. So the combination of less aluminum price, a lower exchange rate would certainly help our costs and especially in packaging material, this is more automatic, say, because we don't carry out too much inventory there. Regarding grains, also the prices are decreasing. in international markets, wheat and as a consequence barley prices. We are finishing up the harvest this day in Chile and Argentina However, we are carrying a little bit more inventory than usually, and this was a risk measure we took after the Ukraine war, where we increased our supply and we will be carrying out a little bit, carrying on inventory that would be diluted or depleted along the year. Also in PT, in resins. also a new electric contract in place that certainly would help to reduce our energy costs. So all in, we saw a more favorable cost equation, let's say. And along with the prices increases we already did, that would be very helpful. But by saying that, our cost base per hectolitre is much higher than in 2019. So although The US dollar is lower than 2022. Average is much higher than 2019. Commodity costs are also much higher than 2019. So all the price actions that we took would be very welcome in order to compensate the trend on commodity prices and exchange rate we have experienced in the last years. So as I said, sequentially, and as you are seeing, we are in the improvement path.

Perfect. Thank you very much.

Thank you very much. Our next question comes from Mr. Sobat Daga from HSBC. Please go ahead, sir. Your line is open.

Hi, Shah. Thanks for giving me the space. I have two questions, please, if I may. First, can you comment on the premium side of the beer portfolio in Chile and how are you viewing the segment prospects for a portfolio, especially when you look at brand Heineken and compare with some of the competitive brands like brand Corona? And then maybe a bit on the revenue management side, can you comment on how you're managing the trade discounts? and share some insights if the trade discount management has gotten better over the last few years, or are you seeing the prospects to be on these lines? Thank you.

Hello, Saurabh. Good morning. Thank you for your question. Regarding the beer portfolio, You know, especially in the big markets such as Argentina and Chile, we manage the full range of price points and positioning regarding different brands. So we are the leaders in craft in Chile, very successful brands in Australia. and kunzman also we are the leaders if you add up in the international brands with heineken and soul so the and and i would i would like to say the evolution of soul in chile have been outstanding uh gaining share gaining volume uh very good performance and so and also heineken is doing it it works but at a lower rate of On the other hand, we had a very good position in Royal Guard, which is a local entry premium brand, which also has had a tremendous growth all over the last 10 years, I would say, with very good brand equity. And also the mainstream brands are preserving at least or even increasing in the last time their brand equity. So we are very, very happy with the portfolio in beer. And we are reaching, in the last 10 years, the highest brand equity that we measure through the preference of the consumer. And this is very important because this led us to your second question at the end. Because when you have a very strong brand equity, Even if you do less promotions than competition and you enhance your price efforts, you have more pricing power with a healthy portfolio. in terms of the brand equity and and this is key so despite what we do in terms of measuring promotion effectiveness or doing revenue management efforts the key and this is very important in our portfolio is that we are entering the year with a very good brand equity level which ensure us that we could maintain our our price points and propositions, and also as a consequence, rationalize promotions and discounts.

That answers. I mean, on the revenue management side, just to follow up on the trade discounts, how about the premium, how about the mainstream and on the soft drinks too, if you can help us with?

Look, we have clear strategies for premium, mainstream. Each brand has its role in a complex market as the Chilean one. So also we do in each of the brands a package strategy, different price points and position. And overall your question in soft drinks is the same. Also the brand equity in soft drinks is very healthy. especially with good evolution of Pepsi. So also our brand equity in soft drinks help us also to design this price architecture and in order to have Healthy portfolio. When I'm talking about healthy portfolio, it's a portfolio where you need less promotions in order to be acquired, to be bought by the consumer at the end. And this is a good advantage. So it's the base of everything, the healthy of the brand. And we are brand builders, not discounters.

Sean, that's helpful. Thank you.

Thank you very much. Our next question comes from Mr. Henrique Blustolin from BTG Pactual. Please go ahead, sir. Your line is open.

Good morning, everyone. Yeah, 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 beverages and non-alcoholic beverages? into 2023, given the comparison basis and total volumes, which when we compare to pre-pandemic, they remain quite strong. And also on volumes, if you could just comment on how this brand equity, which is the highest level on record that you mentioned, how does that compare to the market share, volume share that you have today in Chile? And the second one is regarding margins. If you could just comment on how the profitability in Chile evolved throughout Q4. The idea here is to sort of gauge on what is your run rate going into Q1, especially following the price hikes that you did. So those are the two points I would like to address. Thanks very much. Yeah.

Thank you, Enrique. A lot of questions, but I will try to do my best. As I mentioned, we are experiencing a deceleration of the industries compared to 2022 and, of course, to 2021. No doubt of that. It's difficult to see how much would be this deceleration of the industry because while maintaining market share during the quarter four, we experienced a decrease, not only in alcoholic products, but also in non-alcoholic. But in alcoholic was a little bit more, the decrease in terms of the industry. I would say was a high single digit, or practically double-digit in alcoholic products. However, in non-alcoholic was mid-single-digit decrease. However, still we are talking about high single-digit growth against 2019. So how much would decrease in the upcoming... authors this is the big question i i would say but we are experiencing this is this acceleration for for for sure because we reach very high volumes in 21 and and in a big portion of 20 22. um regarding market share this is the good news we are with high level of not only brand equity as i mentioned but also uh growing market share especially in Chile, in both alcoholic and non-alcoholic products, which is good because at the end we have been doing, you know, big efforts in revenue management. So increasing market share while doing efforts in revenue management is a good news. So that is. Regarding margin, as I mentioned, and I will try to explain again, quarter two, quarter three were the bottom. of the gain. Taking Chile, the margin reduction in both quarters was up to 1,000 basis points in EBITDA margin. In quarter four, you saw 500 was the reduction, 500 basis points, more or less the reduction on EBITDA margin. sequential improvement throughout the month of the quarter, October, November and December, because we took in every month price actions. And also with an improvement of cost, especially due to the exchange rate. So we are more positive that this trend of sequential improvement should continue in the upcoming one so the big risk at the end is the volume risk that's the big risk because of the deceleration of the industries especially in alcoholic as you pointed out that's clear thanks very much

Thank you very much. We are going to be going through the text questions now. We have a couple of text questions. The first one comes from Maria Joseguete from Vidat Security. Hello, everyone. What is your vision of the H-Siri bond covenant if the covenant change is not achieved?

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

Sure, sure, sure. The question is, what is your vision of the H-series bond covenant if the covenant change is not achieved?

Yeah, we expect to achieve the change of the covenant in order to align with all the other bonds, local bonds that we have. And if it is not achieved, we will take, surely, actions on this bond. Nothing to announce. We expect to achieve the change of the covenant for the time being.

Okay, thank you very much. Our next question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, see your line is open.

Hi, good morning and thanks for taking my question. Very quickly, my first question is about Colombia. If you can give us a breakdown of how much of top line growth came from pricing, how much from volume, and also how do you expect this top line to behave in 2023 would be great. And also, can you share what will be your capex this year and the main projects in which you are going to invest? Thank you.

Yep, Colombia. Yeah, Colombia, it was a nice year. We started very well in the first quarters, and then we have experienced some industry desperation. I would say that mostly of the top line came from price, as our volumes were a little bit lower than expected. However, still building a scale there. Going forward, we are looking at the repositioning of some brands, such as, for example, Tecate, with a new value proposition in the market. And also continue to improve or increase the brand equity of Andina while sustaining the performance of Heineken. So that's for COVID. can you question on capex um our topics of 2022 was 190 billion pesos we expect the capex level to be reduces to be reduced going forward uh this year and one of the main project is the the construction the building and construction of of a resting recycling bottle recycling plant to be built in Santiago. This is up to $40 million. This is the main CAPEX project in order to fulfill the sustainability and also the single-use plastic law by 2025. So this is a key project and one of our main projects for the year, the construction of the resin recycling plant in Chile with an investment up to $14 million. Great.

Thank you, Felipe.

Thank you very much. Just a reminder once again, start two for any additional questions. We have one more text question here from Mr. Sergio Winter from Falcom Asset Management. Do you know if the competition in Chile has followed the price increases you did in the fourth quarter? Those price increases you did in Chile were at the beginning, mid or end of the quarter?

I think I would answer the question in a different way. Let's say we have increased prices in all our categories and at the same time we have increased market share from November. So let's say we are in a positive trend of market share. So it seems that all the industries increased prices in the last month.

Okay, thank you very much. 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.

Thank you all for attending this conference call. In the last quarter of 2022, we still suffer from the impact on our costs and expenses from negative external effects and also high comparison base in terms of volumes and financial results. However, as I said, against previous quarters, we are experiencing a sequential improvement. We are entering 2023 in a good shape in terms of prices, business scale and brand equity. This together with the Hercules 2023 plan will be the key drivers to recover profitability. Finally, I would like to take the opportunity to thank all CCU employees as for their efforts and dedication in a particularly challenging year. I am confident that we will continue putting all our efforts to recover a path of profitable and sustainable growth. Have a wonderful day.

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