Compania Cervecerias Unidas, S.A.

Good day, everyone, and welcome to CCU's second quarter 2023 earnings conference call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Claudio Laceras, the head of investor relations. Please go ahead, sir. Thank you.

Welcome, everyone, and thank you for attending CCU's second quarter 2023 conference call. Today with me are Felipe Duvernet, chief financial officer, and Joaquin Trejo, Financial Planning and Investor Vision Manager. You have received a copy of the company's consolidated second quarter 2023 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. Before we begin, please take note of a cautionary statement. A statement made in this call that relates to CCG'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 magically differ. This statement should be taken in conjunction with additional information about risk and uncertainty set forth in CCU's annual report in Form 20F filed with the U.S. Securities and Exchange Commission and in the annual report submitted to the CMF and available on our website. It is now my pleasure to introduce Mr. Felipe Duarte. Thank you, Claudio, and thank you all for joining us today. During the second quarter of 2023, CCU post a strong set of results in a tough economic environment, expanding consolidated volumes by 4.8% and EBITDA by 45.1% from last year. The growth in volumes and EBITDA was 6% and 96.2% respectively when we exclude the wine operating segment, which is facing a particularly challenging scenario due to a sharp decrease in export volumes, in line with the Chilean wine industry. The performance of the Quartet shows that our efforts and initiatives to recover our profitability, framed under the Regional Plan Hercules 2023, are in the right path. However, We are aware that more efforts are needed in order to consolidate this positive trend. Accordingly, looking ahead, we will continue focusing on the six pillars of ERCUMES 2023. Number one, maintain business scale. Number two, strengthen revenue management efforts. Number three, enhance the CCU transformation program to deliver efficiency gains. Number four, optimize capex and working capital. And number four, focus on core brands and high volume margins and innovations. And six, continue investing in our branding. In quarter two, 2023, our revenues expanded 2.8%, boosted by 4.8% rise in volumes, while average prices in Chilean pesos contracted 1.9%. The expansion in volumes in the quarter allowed us to be on track to maintain business scale in 2023, in line with pillar number one of Hercules. The lower average prices in Chilean pesos were largely explained by the negative translation effect in Argentina, although in local currency involved in line with inflation. And in the Chile operating segment, average price grew high single-digit during the quarter in spite of negative mixed effects. Gross profit jumped 10.7% and gross margin improved from 40.3% to 43.4%, the latter driven by the higher revenues but also associated with more favorable costs in relevant packaging materials and the appreciation of the Chilean pesos versus the US dollar impacting positively our US dollar denominated cost in line with pillar number two of Hercules. MSM DNA expenses increased 3.6% versus last year, and as a percentage of net sales were practically flat due to efficiencies through all our operating segments, in line with pillar number three of Hercules. In all, EBITDA was up to by 45.1% and net income totalized a loss of 3,943 million Chilean pesos versus a negative result of 10,455 million Chilean pesos last year. Additionally, in Q2 2023, we kept delivering a strong cash generation versus 2022. Thus, As of June 2023, net cash inflow from operating activities expanded, and net cash outflow from investing activities decreased during the same period, in line with pillar number four of RQS. In addition, we reduced our portfolio complexity and recorded strong brand preference indicators, being key to gain or maintain market share in our main categories, in line with pillar number five and number six of RQS. In summary, consolidated volumes increased 4.8%, driven by a 4.7% expansion in the Chile operating segment, and an 8.1% growth in international business operating segment, partially compensated by a 13.4% contraction in the wine operating segment. Net sales were up 2.8%, and gross profit increased 10.7%. Consolidated EBITDA reached 47,126 million Chilean pesos, a 45.1% increase. A big variation in the operating segment was as follows. An 86% jump in our Chile core operating segment, a 74.9% expansion in the international business operating segment, and a contraction of 44.5% in the wine operating segment. Finally, as I said, we have an increase in our results at net income level. Now I will be glad to answer any question you may have.

Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. We acknowledge all the questions already in the queue. If you have any additional questions, please press star 2. That's star 2 on your keypad and wait for your name to be called. You may also ask a voice or a text question if you have dialed in via the web. We'll now give a moment or so for the questions to come in. We'll take the first question from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir.

Thanks, operator, and good afternoon, Felipe, Joaquin, and Claudio. Congrats on the results, really nice rebound from a year ago. I wanted to ask questions about the changes that you think will be implemented with distribution in Argentina. and how it seems that a piece of the portfolio might be leaving from the Koch system. I'm just wondering if you could give us any details around that, hopefully something like which brands you're planning to remove or what percentage of volumes you're trying to get out of the system. And also, I wanted to know what's the plan once you're out of the system. Is it going to be to create your own distribution network or did you find another third party that you thought could would do a better job than Coke. Any details you can give us around this would be great.

Thank you, Felipe, for your question regarding our distribution now, the changes we are doing in our distribution in Argentina. Before, let me give you some background. We used to have our own distribution in the vast majority of the country. So last year we had two Coca-Cola bottlers, Arca and Andina, distributing in particular areas of geography such as the north, Arca, and south plus other regions, the Coca-Cola system. It accounted for more or less 20% of our total volumes. But as we said in our press release, the distribution agreement that we had in some regions with the two Coca-Cola bottles that I already mentioned expired in June. So in those regions, we have implemented a new distribution network. That is a joint distribution of beer and with our recently water business acquired or the participation we have in the JV with Danone in Argentina. So practically in all the country this network is implemented. That is combining beer, wine, liquors, but also now the water business. As we said, At the same time, we are negotiating a potential new distribution agreement with Coca-Cola bottlers, which could include some of the brands of our portfolio. Some brands of our portfolio could go with the distribution with the Coca-Cola bottlers. But so far, we are still negotiating a potential agreement with them. But in summary, the new distribution network was successfully implemented now in Argentina, and also we went live with all the systems integrating the water business to our systems, the CCU systems, at an IT level in Argentina. Also a very successful implementation. Okay, Felipe?

No, that's very clear, Felipe. So that means that while you negotiate in the distribution of Coca-Cola, you're already distributing in your own system. Is that correct?

No, we are distributing now with our own system. And I want to be clear. The Coca-Cola only distributes in particular areas this agreement finish in the end of June, okay? But we have negotiated that they could distribute some of our drugs or maybe a potential agreement, period.

Okay, that's very clear. And the second question I wanted to ask you, just wondering how you feel the temperature of the Chilean consumer is, you know, what's the mood, what's the sentiment for the consumer underground in Chile?

Yeah, we had a good expansion in volumes in Chile during Q2. As you notice, a 4.7% growth. As we said, this is still above pre-pandemic figures, okay? So that is a good growth, to be honest. However, the comp of quarter two was easier than the comp of quarter one of last year, because quarter one of last year, as you know, we had the influence of government aid plus the withdrawal of the pension funds in Chile that boosted consumption. So I would say we are happy with the evolution of the industry in order to maintain our business scale. We were also very clear in saying that the economy has been desaccelerating. Therefore, consumption has accelerated, especially in the last four quarters, I would say. But from quarter two, you will be seeing growth. as our categories are more resilient to reduce the purchase power of the consumer. In summary, in terms of the evolution of the consumer, I would say we are confident that we will be able to maintain our business scale in the following quarters.

Very clear. Just a follow-up on that Chile question. Is premium, the premium segment of the portfolio now stabilized?

Yeah, what I would say, and as we have stated during the, in our release, a portion of our revenue management efforts were offset by the mix of our portfolio, let's say. So we reach, as you know, a record in terms of premium mix, especially in beer category, but also in wine, also in liquors during the end of 2021 and beginning of 2022. So I would say this has been stabilized in quarter two with a reduction compared to last year where in fact who is growing more is the mainstream brands, especially in beer, but also in wine.

That's all very clear. Thanks a lot for your comments.

Thank you, Felipe. Have a wonderful day. Thank you very much for the question. Our next question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, sir.

Great. Thank you. Good afternoon, everyone. Thanks for taking my questions. Just to follow up, Felipe, regarding Chile. Sorry. At the beer segment, I mean, can you comment how your market share behaved during the quarter? And my second question is regarding the international business. If you can comment what were the main drivers of volume growth and what is your outlook for the second half of the year? Thank you.

Yeah. Regarding the beer, I would say it has been in the last quarter we have had a stable market share. You could gain one point, one month, and the later one reduced by half a point. So a stable market share in the last, I would say, six quarters in beer. Regarding your question about international business, The comps were a little bit, especially in Argentina last year, the comps were low. So Argentina, in fact, volumes have been a challenge in the last quarters as the high levels of inflation is affecting consumer purchase power, let's say. We had, let's say, in Uruguay, particularly an extraordinary situation linked to the drought conditions during the summer, but we had a scarcity of public water, let's say, and that boosted our water sales in Uruguay during quarter two. Along also a very good performance in Paraguay, growing the volumes, high single digits, that is encouraging the results in Paraguay. In the case of Bolivia, very depressed volumes in Bolivia. So going forward, it would depend on the international segment, as you know, the big participation of Argentina. But we think Argentina is in a negative trend in terms of volume. And we could see some decrease quarter on quarter in terms of volume in the next looking forward.

Great. Thank you, Felipe.

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

Hi, hello, Felipe, Joaquin, Claudio. Thanks for taking my question. I would like to explore a little bit more the recovery and profitability in Chile going forward to historical levels. And if you could break it down from two different perspectives, the first one coming from costs, right? How should you think about COS in the second half of the year compared to what you deliver now in the first half, especially now that we see maybe a slightly weaker Chilean peso and overall stable commodity prices? And the second one on the pricing front, as you mentioned, pricing has been very strong over the past year, even with some negative mixed impact, but we see the results in your net revenues per hectolitre. And the industry performance, even though it's not grown as much, volumes remain pretty strong relative to pre-pandemic. So the question, I think, is how much room do you see for additional price hikes on the back half of the year that could help bring margins back to those levels from pre-pandemic? Those are the two questions. Thank you.

Thank you. Thank you, Enrique. Thank you. Yeah, so far, I think these are the first steps in order to recover our pre-pandemic margins. As you pointed out, we have had a massive... If you compare all the raw materials compared to the pre-pandemic level, let me give you just one example. Aluminium prices in 2019 was $1,800 per ton, and now has stabilized at $2,400 per ton. So that's a significant increase between 25% to 30%. Yeah, we had very high aluminum prices right after the Russian invasion to Ukraine, where it jumped to $300 per ton. Now it's stabilized at a lower level, but it's still much higher than the levels we saw. This is a long path, because as we said, in this kind of business, you gradually recover margin, and this is what we have been done, especially from quarter four last year, quarter one, and now quarter two. As you pointed out, with the differences in terms of interest rate reduction between the Fed and the Chilean central bank, we have seen an increase of the exchange rate, thus a devaluation of the Chilean peso that certainly impacts our cost. If this is maintained, I think maybe it's for sure that this should be considered in our pricing strategy. But I would say it would depend on competition, it would depend on many factors for the price So I don't want to – but let's see about that. On the other hand, cost perspective, I think raw material are more or less stable. We have high cost pressure in sugar due to supply and demand global conditions, especially in India. So there we have pressure. But another good news, as I said, I think in two or three calls, that we are high levels of inventories. And you saw in our catch generation that we have been reducing our raw materials inventories according to normal levels that we had before the Russian invasion. So also this would help surely into our cost. But, to be honest, we always face unstable volatility of exchange rates, and the aim is to gradually recover our prepandemic margins. Okay, Enrique?

That's clear. Thanks, Felipe.

Thank you very much. Just a reminder, star two for any additional questions. Our next question is from Martin Zeche from Fundamenta Capital. It's a text question. Should we expect cost per liter in Chile to be negative year on year, given high comparables in commodities and better effects, or should we expect it to be positive but below inflation? Thank you.

Thank you, Martin. Yes, of course, but especially in the last two quarters, especially the third quarter last year, we practically experienced a thousand pesos per dollar exchange rate. Now it's stabilized, it's stable at the last two weeks, let's say, at 850. So there we have some benefits. As I mentioned in the previous question, the cost pressure for sugar prices compared to last year. So that's, so answering your question, it should be negative especially in quarter three.

Okay, thank you very much. It looks like we have no further questions at this point. I will pass the line to CCU team for the concluding remarks.

During Q2 2023, we consolidated a recovery path in our financial results in a tough economic environment. The latter was mainly driven by the implementation of HLS 2023. although we are aware that more efforts are needed to keep improving profitability. In order to do so, during the second semester and ahead, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you all a wonderful afternoon and evening.

Thank you very much. This concludes today's conference call. We'll now be closing all lines. Thank you, and goodbye.