Compania Cervecerias Unidas, S.A.

everyone, and thank you for attending CCU's first quarter 2023 conference call. Today with me are Felipe Duvernet, Chief Financial Officer, and Carlos Andante, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated first quarter 2023 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. Before we begin, as usual, please take notice of our cautionary statement. 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 risks and uncertainties set forth in CCU's annual report in Form 20F filed with the US Security and Exchange Commission and in the annual report submitted to the CMF available on our website. It is now my pleasure to introduce Felipe Duerme.

Thank you, Carlo, Claudio, and thank you all for joining us today. During the first quarter 2023, CCU posted the recovery in financial results. with a stable EBITDA from previous year in a tough economic environment. This better performance was mostly driven by our main operating segment, Chile, as a consequence of the implementation of our recovery profitability plan, Hercules 2023. The upward trend in results during the last quarters showed us that we are in the right path. Nonetheless, we are aware that the results of the first quarter of this year are only the beginning, and to consolidate this trend, we will continue focusing on the six pillars of Hercules 2023, which are, first, maintaining business scale, then strengthening revenue management effort, third, enhance the CCU transformation program to deliver efficiency gains, number four, optimize CapEx and working capital, Five, focus on core brands and high volume margin innovations. And six, continue investing in our brand equity. Before describing the performance of the quarter, it is important to mention that results from the first quarter 2022 were still highly influenced by a particularly positive scenario for consumption in Chile, as consolidated volumes during that quarter were up 7.1% versus first quarter 2021. After that, volumes contracted compared with the same quarter of previous year, 2.9, 2.8, and 5.5% in the second, third, and fourth quarter of 2022, respectively. Therefore, in spite of decreasing volumes in the first quarter of 2023, we are still on track to maintain business scale in 2023, in line with our pillar number one of our regional plan, Hercules. During first quarter 2023, our revenues expanded 4.5%, boosted by 8.1% growth in average prices in Chilean pesos, partially offset by a low single-digit drop in volumes. The lower volumes were caused by contractions in all the operating segments, mostly due to a high comparison base, as mentioned before, especially in Chile, a weaker consumption environment in Argentina, and lower wine exports. The better average prices in Chilean pesos were mainly explained by revenue management initiatives in all our main geographies and categories, despite negative mixed effects, in line with pillar number two of our regional plan, Hercules. gross profit jumped 9.6% and gross margin rose 227 basis points. The later also associated with lower cost pressures as a consequence of more favorable cost in some key packaging materials. MS and DMA expenses as a percentage of net sales deteriorated 317 basis points, mainly as a consequence of the low base of marketing expenses in the last year first quarter due to FACI and higher distribution expenses. This was partially compensated with efficiencies through all our operating segments which will be more reflected during the rest of the year in line with our third pillar of Hercules. In all, Edipta reached a 0.2% increase and EBITDA margin contracted 80 basis points. The slight expansion in EBITDA is surely a good start to recover our financial results, although more efforts are needed to consolidate the profitability improvement in an inflationary scenario. Regarding net income, it fell 9.6%, associated with a lower non-operating result, mostly due to higher financial costs and a higher loss in equity and income of JVs and associated. Additionally, in the first quarter of 2023, we deliver a stronger cash generation. Net cash inflow from operating activities expanded versus last year, while net cash outflow from investor activities were stable versus last year. This is in line with our fourth pillar of Hercules. Furthermore, we reduce our portfolio complexity while brand equity remains in high levels, especially in our core brands, and continue to be key to gain and maintain market share in our main categories. This fulfills our pillar number five and six of Hercules. In the chain operating segment, our result posed a positive turning point after four consecutive quarters of contractions in Avista. Top line expanded 6.4%, driven by 7.6% growth in average prices, while volumes dropped 1.1%. Prices were higher due to revenue management efforts in all our categories. partially offset by negative mixed effects in the portfolio. Volumes were resilient through the quarter, although decreased mainly associated with the tough comparison days. Gross profit expanded 14.9%, and gross margin improved 350 basis points, also as a result of lower cost pressures and efficiencies in manufacturing costs. NSMDNA expenses as percentage of sales deteriorated 357 basis points, mainly by lower comparison-based marketing expenses in the last year first quarter due to phasing and higher distribution expenses. Consequently, EBITDA increased 6.8% and EBITDA margin was stable. In international business operating segments, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 4.7% rate as a result of an increase of 13.9% in average prices in Chilean pesos, partially offset by a 8.1 contraction in volumes. Industry volumes were weaker in all the geographies, but mainly in Argentina, as a consequence of a difficult economic context. The better average prices in Chilean pesos were explained by prices increases in line with inflation in Argentina and revenue management initiatives in all the other geographies. Consequently, gross profit expanded 9.3% and gross margin grew from 52.9% to 55.3%. MS and DNA expenses as a percentage of net sales deteriorated by 161 basis points, due to a lower scale in Argentina. Altogether, EBITDA expanded 7.9% and EBITDA margin improved 53 basis points. The wine operating segment faced a particularly challenging scenario during the quarter. Rennies were down 17.7%, fully explained by weaker volumes. Average prices were flat as revenue management efforts in domestic markets were offset by negative mixed effects in export volumes. The lower volumes was mostly attributable to exports, which contracted in the low 20s, associated with inventories, adjustments from our clients and distributors. On the other side, domestic volumes in Chile dropped mid-signal digits. As a result of all the above, gross profit deteriorated 32.5% and gross margin contracted 699 basis points. MSN DNA expenses dropped 1.9%, although as percentage of net sales deteriorated by 508 basis points due to the lower revenues in oil. due to lower revenues. In all, Edipta reached 3,496 million Chilean pesos and 69.5% fall. Regarding our main JVs and associated business, in Colombia we started 2023 with a low single-digit decrease in volumes, while in Argentina, our water business with Danone showed a low pin expansion in volumes. Both businesses are relevant for our regional multi-category beverage strategy, being committed to continue gaining scale to build profitability in the future. Now, I will be glad to answer any questions you may have.

Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you have any questions, please press star 2 on your keypad. That's star 2 on your keypad for any questions. If you are dialed in via the web, you may also ask a voice or a text question. We will now give a few moments for the questions to come in.

Thank you. Our first question comes from Mr. Fregote from JP Morgan.

Please go ahead, sir. Your line is open.

Hi, thanks so much. Hi, Felipe, Carlos, Claudio. Thanks so much for the space for questions. So I had two quick questions here. So first, if you could maybe walk us through a little bit if there's any need for additional price increases, mainly in the Chilean operations, see how that dynamic is going, a little bit understand how the consumer and the market is reacting to those increases that you have been rolling out for some quarters now. And the second one, maybe if you can walk us through a little bit on the plan that you have for the wine business. Obviously, it was a challenging quarter, but any short-term actions that you have mapped out there to kind of have some relief there on the pressure that we saw during the quarter? Thank you so much.

Thank you, Ulises, right, for your question. Regarding pricing, yes, this is in line with our Hercules pillar number two to enhance our revenue management efforts. As we stated in previous calls, we entered 2023 in good shape in terms of prices in order to compensate our cost inflation in our P&L. In quarter three, prices evolved in line with the industry, and we did an additional price increase in both beer and non-alcoholic in Chile in April. So how the consumer is reacting to that, you notice a small decrease in terms of volume overall of 1.1%. So I would say that our feeling is that the consumer is pretty resilient, let's say, given the price increases, because I would remind you the high comps that we had over last year, first quarter, when volumes grew mainly in Chile. So I would say with together pillar number two of Hercules of enhancing our revenue management efforts, we were more or less able to fulfill also pillar number one, that is to maintain our absolute scale in the business. So I would say It's only the first quarter of the year. Going ahead, we need to see how this will evolve. Regarding the wine business, yeah, we need to enhance, you know, our equity plan within the wine business. For sure, our volumes are suffering in the export market. As you notice, volumes dropped more than 20% in the exports, and this is mainly due to reduction of inventories of our clients and distributors in the North Hemisphere. So how we will overcome this situation? I would say we need to enhance our commercial efforts. So in key markets, such as England, such as US, such as China, especially China. And we need to work in our mix also because also our mix deteriorated during the first quarter. So improve execution, these are the tools. Certainly we face a difficult global scenario not only due to this inventory reduction but also due to a lower wine consumption in the world. So we need to at the end to compensate that also through efficiencies in the bottom line that this is in line with all the other units of CCU that is to enhance our efficiency particularly in wine. But that would be our response. We face a complex scenario of the global wine industry.

All right, no, that is perfect. Thank you so much for the color of the paper and congrats once again there on the very strong results.

Okay, thank you very much. Our next question comes from Mr. Enrique Bustolin from BTG. Please go ahead, sir. Your line is open.

Hi, hello, Felipe, Carlos, Claudio. Thanks for taking my questions. The first one in Chile, if you could comment a little bit, we saw this very good improvement in terms of your unitary costs in the division, right? So if you could comment a little bit how much of these lower commodity prices are already reflected into these Q1 results. or how much more you might still benefit from, you know, the current cost structure. That's the first one. And the second one, also in Chile, you mentioned the negative mix effect. If you could just give more details in terms of, if you mean by that, the performance of beer versus non-alcoholic. And within beer, if you could comment a little bit on how was the product mix, right, when it comes to the performance of premium brands versus mainstream core brands, right? Okay. These are the two questions.

Certainly, we are with good headwinds in terms of cost pressures, especially when we come from very short quarters, such as quarter two, quarter three, and quarter four of last year. But on a quarter-to-quarter base, quarter-on-quarter, the chain rate is flat. still we are not benefiting, I would say, comparing quarter to quarter with the chain rate. Certainly there are certain commodities that dropped their prices, especially in packaging materials, aluminum. Certainly this is helping, mainly aluminum. However, we have bad news regarding our other materials such as sugar. As many of you know, India suffered a very poor harvest in terms of sugar. It's a high consumer globally of sugar. So sugar prices are, the futures now are traded at more than 200 extra US dollars per ton from 500 of last year to 700 or more. or high $600 per ton in the international market. So we have, so on the one side, maybe in the future, if the macros are maintained, especially exchange rate, we will, certainly we have, given the comparison, a better cost. Also, it's good to remind that in some hero materials, we took a decision to increase inventory such as PT, such as more, but this inventory is being depleted, is being reduced, and we expect that especially in PT to benefit from slightly better prices in the second semester. So your commentary is okay in terms of facing lower cost, especially in the next quarter if the exchange rate of the Chilean pesos is maintained. Your question regarding mix, yeah, I made a commentary, we will use the volumes in the Chile operating segment reduced by 1.1%. I would say we have a high comp in beer. Beer use volumes low single digit being non-alcoholic flat. I would remind that we have some fires in Chile during February and very unfortunate situations and high temperatures during March this set themselves the non-alcoholic business to be flat in terms of volumes. And within a beer, the mix of beer, I would say although we keep a momentum in terms of premium, however, it's lower than a beer. So the premium reduces the percentage within the whole mix compared to the medicine. This is what we call overall mix effect in the portfolio. So despite that, despite what I'm talking about the mix, net prices increase, I would say, practically 8% during the quarter.

That's very clear. Thanks very much.

Thank you very much for that question. The next question comes from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir. Your line is open.

Thanks, operator. Hola, Patricia and Felipe. Thanks for the space for questions. Both of my questions were asked, but let me do follow-ups on them. So the first one on the mix, which Enrique just asked, so you discussed beer versus nabs, and you discussed colonization. Just wondering if you can address packaging mix and channel mix, how those have evolved. And then my other follow-up would be on the wine question that was asked earlier on. So what's happening is clearly global and industry-wide. We're seeing a reduction in inventories everywhere, not just Chilean peers, but we're seeing it with US spirits peers as well. Just wondering what your view is on the duration of that inventory correction. Do you think most of it has already happened and we're sort of done? And then also wanted to ask if you've seen that correction in inventories more pronounced in certain regions. Not sure if maybe China is picking up or other regions are reducing their inventories. Just wondering if there's a difference across regions.

Thank you. Let me start by the last question regarding the wine. Inventory reduction is all across the board because with high interest rate globally and also because we came from very high levels of inventory because you are aware that during the pandemic, clients and distributors increased their inventory policy given the short touch that we had in freight. So, this reduction of inventory has two main drivers. One, high interest rate, and the second one is because they had massive inventory increase in the past, given the logistic term. It's difficult to know how much is inventory, so we know that it's inventory for sure, as of today. But also there is a reduction in the, but we don't have it because it is, you know, we export to more than 80 markets to have an overall, certainly in the next month we will have a clear picture in terms of an industry reduction, global industry reduction of wine consumption, right? So that's the situation regarding the wine. Regarding the mix, I think the mix effect in beer are mostly linked to brands. But it is good to remind that we came from very high premium mix in the past. Certainly, the consumer has less money available at the end, less affordability, so there is a number of consumers moving from premium brands to consume mainstream brands. However, I would like to say that before the pandemic, the premium mix was in the high 20s, let's say, 30%, and it jumped at the peak of the after the pension fund withdraw in Chile to a number about 50%. Now it moved to 40%. So still we have a higher premium needs than before the pandemic. Regarding the movement of channels, it moves but not significantly.

Okay, that's very clear. Thanks a lot for that. Maybe if I can ask just one follow up on the wine issue, would you say that the sellout is as solid as it had been? I mean, clearly the weakness is on the selling, but how's the sellout performing?

Yeah, the sellouts are not performing badly, let's say. As of today, it's mainly related to inventory reduction. However, in the first part of the quarter, sell-outs were solid. But in the last month, it reduced its running rate, the sell-out.

Okay, got it. Thanks a lot for the call. I really appreciate it, guys.

Okay, thank you very much for the question. We're gonna read out a couple of text questions at this point. The first text question is from Vidi Vira from Goldman Sachs. Congratulations on the results. How is the demand and pricing in Chile shaping up this quarter?

As we said, we have increased price, especially last quarter of last year, we entered with better prices in the quarter, and the demand more or less, or the scale of the business in Chile was maintained, because reducing the volumes by 1.1%, with a very high comp, because I would remind you that volumes last year in the first quarter grew by 1.1%. grew 7.1% overall for the overall business. So that's the, but then in quarter two, quarter three, it start a reduction in terms of volumes. So given the price increase, I would say that the volumes are, we feel that they are resilient. Of course, we will not grow at the rate that we grew in 2021 when we had, you know, the pension fund withdrawal in Chile and a boost in terms of consumption.

Okay, thank you very much. The next question comes from, we saw that there was a text and a voice question, so we just unmuted your line. Mr. Rodrigo Godoy from Credit Corp, your line is open.

Yeah, it's regarding the wine segment. If we show the same trend in quarter two in terms of volumes as we have had, in quarter one. I think still we had a negative volume in April. However, just in May it improves because the stocking of clients is finishing, but it would be very difficult to compensate all over the year the inventory reduction that impacted volume here in the first quarter. And then the other question is about the Chilean operating segment. Could you give some color in the recent trend in volumes in quarter 2023? If still we are in the middle of the quarter, it would be we increase prices in both non-alcoholic and beer in April. So we had a boost in volumes in April, but we think it would stabilize in May and June. Certainly, we don't do forward . Still 50% of the quarter is not completed, but we expect that we will do volumes because quarter two of last year was the worst quarter in terms of for confirmation.

Okay, thank you very much. We will now give another moment or so for any additional questions to come in. Okay, the next question we have is from Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.

Hi, good afternoon. Can you hear me?

Yes, please go ahead. Yes, Fernando. Go ahead.

Thank you so much for the space for questions. I have two. The first one is regarding... related to Chile. How are you thinking about marketing expenses, the remaining of the year, given a more modest demand versus last year? And when do you expect the low base comparison to finish? And I'll wait for the second question.

Okay. It's very specific, your question. So let me first strategically, in the number six of Earth, let's state that we need to enhance and protect our brand equities. So every CCC we do in expenses, it is not at the expense of marketing expenses. We will continue investing behind our brand. Regarding the comparison of, that was particularly first quarter of last year, market expenses due to facing were particularly low. So, but in this quarter is the market expenses are in in the normal shape let's say so and but let me emphasize that we will continue uh investing aligned with our uh pillar number six of hercules behind the brand okay now i think you have a fernando second question right yes my second question is related to the international business now if you can comment what was the performance between premium and non-premium

beer brands and how do you expect volume to behave the remaining of the year? Thank you.

I think the situation in international business is a little bit different than in Chile. Particularly, there are two markets where volumes are suffering, especially Argentina, given the high inflation. Certainly the consumer has less money available. And Bolivia also, particularly Bolivia also is suffering from an industry reduction. Uruguay is more healthy and Paraguay was affected by this tropical disease during the first quarter. So I... we hope it would be in better shape in the upcoming quarters. But the volume reductions may be in Argentina and Bolivia.

Okay. And what is your expectation, I mean, in terms of volume going forward after the decline we saw this first quarter?

In international business, you mean?

Yes, at the international business, Felipe. Thank you.

Yeah, I would say Argentina has still the same fundamentals in terms of high inflation, potential devaluation. So I think we will not see a recovery in terms of volumes in Argentina, while pricing would be in line with inflation.

Got it. Great. Thank you.

Okay, thank you. Thank you very much. We see no further questions at this point. I'll pass the line back to the management team for any concluding remarks.

Thank you all for attending today. In the first quarter of 2023, we delivered a recovery in our financial results in a tough economic environment. The latter was mainly driven by the implementation of Hercules 2023. For the rest of the year, we will continue executing this plan. These are the first steps to deliver profitable and sustainable growth in a volatile context. Thank you and have a wonderful day.

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you very much. Goodbye.