Compania Cervecerias Unidas, S.A.

Good day, everyone, and welcome to CCU's third quarter 2023 earnings conference call on the 9th of November. Today's conference call is being recorded. At this time, I would like to turn the conference over to Claudio Lazzaras, the head of investor relations. Please go ahead, sir.

Welcome, everyone, and thank you for attending CCU's third quarter 2023 conference call. Today with me is Mr. Felipe Duvernet, chief financial officer. You have received a copy of the company's consolidated third quarter 2023 results. Felipe will now review our overall performance, and we will then move on to a Q&A session. Before we begin, as usual, please take note of our cautionary statement. 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 the performance or results to materially differ. This statement should be taken in conjunction with the additional information about risks and uncertainties set forth in CCU's annual report in our 20F form 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 Lubernet.

Thank you, Claudio, and thank you all for joining us today. During the third quarter of 2023, CCU continued making progress to recover financial results and profitability in a challenging and volatile economic environment. The latter is shown at the operational level, increasing consolidated EBITDA by 27.7% and improving 269 basis points EBITDA margins. The performance of the quarter shows that the path to improve our profitability under the regional plan Hercules is moving forward. However, stronger efforts are needed in a context of economic disacceleration and volatility in exchange rates and commodity prices. This drives us to focus on the pillars of Hercules. First, maintain business scale, strengthening revenue management efforts, deliver efficiency gains through our transformation program, optimizing CapEx and working capital, focusing on core brands and high volume margin innovations, and continue investing in our brand equity. In quarter three, 2023, our revenues expanded 0.4%, explained by 5.1% increase in volumes, more than offset by a 5.7% decrease expansion in average prices in Chilean pesos. Lower volumes were caused by weaker consumption in Chile and Argentina and worse weather, especially in Chile, while holding market share and a contraction in wine exports. The higher average prices in Chilean pesos were a consequence of revenue management efforts across all our operating segments. Gross profit jumped at 8.9% and gross margin rose 362 basis points, the later explained by the higher average prices and flat average cost of goods sold versus last year. NS and DNA expenses increased 2.9% and the percentage of net sales grew 94 basis points, mainly as a consequence of higher marketing activities, the later to keep enhancing brand equity. In all, EBITDA reached 86,344 basis points Up by 37.7%. Net income dropped 44.9%, totalizing a gain of 9,499 million chilean pesos. during the quarter. And second, $8,665 million of non-recruiting expenses related with the integration of the route to market of our JV in Argentina with our Danones into our beer and cider operation. In terms of cash generation, We deliver another robust quarter. That of September, 2023, net cash inflow from operating activities totalized 205,681 million Chilean pesos versus the negative cash inflow of 21,871 million pesos. In 2022, wide net cash outflow from industrial activities reached 111,051 million Chilean pesos, decreasing from the 175,168 million Chilean pesos during the same period in 2022. In addition, we have decreased our portfolio complexity and recorded strong brand equity indicators, being key to hold back the share in our main categories. In the Chile operating segment, Our top line expanded 5.1%, explained by 4.7% decrease in volumes being more than offset by 10.2% growth in average prices. The higher average prices were explained by a robust revenue management initiative that we have taken from end of last year. Lower volumes were explained by challenging consumption environment along with unfavorable weather, although in line with the industry as market share remained stable. Gross profit expanded 17.4% due to top line performance and lower cost pressures. MS and DNA expenses were 12.3% higher and as a percentage of net sales grew 237 basis points, mostly due to higher marketing activities. In all, EDIPTA reached 52,618 million Chilean pesos, growing 38.7%, and EDIPTA margin increased 320 basis points. In international business operating segments, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded a 2.4 percent contraction in Chilean pesos as a result of 4.3% drop in volumes, partially offset by 2% increase in average prices in Chilean pesos. Volumes were negatively impacted by a weaker consumption environment in Argentina, partially compensated by volume expansion in all the other geographies. Gross profit expanded 1.1%. MS and DNA expenses decreased 6% and as a percent of net sales, improved 167 basis points due to efficiencies, compensating high inflation and other cost pressures, especially in Argentina. Altogether, EBITDA reached 25,785 million Chilean pesos, a 30.2% expansion from last year. The wine operating segment continues facing a tough business environment during the quarter. Revenues were down 4.7%, mostly explained by a 17.3% contraction in volumes, while average prices increased 3.1% due to revenue management in the domestic market partially compensated with negative mixed effects. The lower volumes was explained by both a 14.4% fall in exports from Chile and a 14.8% drop in the Chile domestic market. Gross profit dropped 8.1% but gross margin improved 296 basis points due to higher average prices and a decrease in cost per liter due to a more favorable cost of wine. MS and DNA expenses were flat versus last year and as a percentage of net sales increased 429 basis points associated with a lower business scale. In all, EBITDA reached 11,606 million chilean pesos, a 21.2 contraction. In terms of our main JVs and associated business, in Argentina, volumes of our water business decreased low double digits, mainly impacted by a challenging consumption environment. Also, we successfully continued with the route to market integration of this business. Finally, in Colombia, volumes contracted . 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. If you have any questions, please press star 2 on your keypad. That's star 2 on your keypad and wait for your name to be called. If you're dialed in via the web, you may also ask a voice or a text question. We'll now give a few moments for questions to come in. Thank you. Our first question comes from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir. Your line is open.

Thanks, operator. And good morning, Felipe and team. Thanks for the space for questions. First, let me start with volumes. Clearly, the volumes were not excellent in the quarter. When you look at the third quarter of each year for the past few years, you've been coming down from the peak of 8.2, I think, in 2021, then 7.9 in 22, now 7.6. Do you think the post-pandemic correction is done? Should we be thinking about normalized volumes for here on out, or do you foresee that there's a little more pain ahead given what's happening with consumption in Chile.

Hello Felipe, how are you? First of all, comparing volumes, nowadays volumes with 2021 and maybe 2021 especially is not the right comparison because you have 55 billion of pension fund withdraw in Chile and a boom in consumption. So as 2020 was the year of the pandemic, of the lockdowns, 2021 was the party in consumption in Chile due to the pension fund withdrawal. So I like especially to do a comparison with pre-pandemic volumes. This is from 2019. And total CCU volumes compared to 2019 to 2019 are 14% more and compared to a third quarter of 23 against third quarter 2019 is 10%. So the first pillar of Hercules is to preserve a scale, to maintain a scale, both relative scale and absolute scale. And I think in this task we are in this task. Regarding the third quarter volumes, of course, we came from a volume, a reduction in volume in quarter one of 3.4%, but we were still comparing with a very high comparison in quarter one of 22, because still we had the effect, once again, of the pension fund withdraw. Then we had an excellent growth in the second quarter, growing 4.8 volumes, and minus 5%. And coming to Chile, of course, we decreased the volumes in quarter one, minus 1.2, because of the big comparison, so it was a very good volume. In quarter two, we grew 4.7%, and now we decreased 4.7%. Of course, I think there is two factors on that. The first factor has to do with temperatures, We have had a very rainy, which is very good for Chile as a country, of course, to have good level of rain, because we have drought conditions, so it's very good. So we had a lot of rain during July, August, and the start of the spring, and also cold temperatures. So the decrease in volumes in Chile are partially explained by temperature. On the other hand, of course, there is this acceleration in terms of of consumption. And we have been always predictive on that because Hercules is about maintaining scale. So overall, if you look at overall results in Chile, we are maintaining more or less the scale in absolute terms. As we are, practically my volumes, our volumes in Chile are minus 0.7% less than last year. So overall, maintaining the scale. And in terms of relative scale that take into account the market share, we are holding, even growing in some categories, our market share positions. That's the scenario. Going forward is difficult to predict. We will continue to face, I think, a very, at least in the next few quarters maybe, this acceleration. I don't see a further acceleration in loans. that we will be able to maintain the scale. I don't see something different given that. Quarter on quarter, it would depend on weather, it would depend on temperatures. It's impossible to forecast weather. There are some people that said that we'll have a very hot summer, but I don't know. I think meteorology is difficult. Meteorology is a difficult science. That is what we see in terms of consumption.

Okay, that's very helpful, Felipe. So you essentially think that you're at more or less a new baseline for the company, right? Maybe if I can do a follow-up for costs. You know, you've had some very good quarters of improvements on costs, right? in recent times, and it seemed that cost didn't provide that much of a tailwind in this quarter. What's your outlook for the next few quarters?

Yeah, look, in terms of cost, I think we had some good news, but also some bad news. I think we have bad news regarding the non-alcoholic business. especially the non-alcoholic business, given the sugar prices that are at historical level, and also orange juice. Orange juice, the tailwinds are very bad for orange juice and sugar. In terms of grains, it's a question of carryover of inventories. As I said in previous communications of previous conference call, last year we benefit of pre-Ukraine prices for barley. That, of course, in the global market, barley has been reducing the prices. However, we still have, in this year now, we have benefited a lot of the pre-Ukraine cost levels. That's because of the opposite season that we have with Europe. But in general, in India, we see a stable cost, unit cost. And a lot of pressure in non-alcoholic beverages given sugar prices and on orange juice.

Okay, that's very clear. I'll get back on the queue for a few more questions if they're not asked. Thanks a lot, Felipe. Thank you, and have a wonderful day, Felipe.

Thank you very much. Our next question comes from Tiago Bellusi from Goldman Sachs. Please go ahead, sir.

Yes, hi. Thanks Felipe and Claudio for taking the questions and good afternoon everyone. So I'll like to follow up now on SG&A, right? I see your efficiency ratio has marginally deteriorated and it seems that most of the pressure was due to marketing, right? Parallel to this, we see Chile demand has been volatile. The company keeps pushing prices higher. So Putting everything in perspective, I am wondering how much more marketing would you need to invest in order to keep scale amidst a very volatile demand backdrop, right? And this is the first part of the question. And the second part of the question, assuming marketing will likely continue to be an important driver for you to keep volumes, how much more efficiency the Hercules plan could extract in other lines eventually to partially offset this and protect your EBITDA margin. And that's the question. Thank you very much.

Overall, I would say you are right that MSME and I increase a little bit in terms of percentage of net sales. I would say we recover normal levels of marketing expenses this year compared to 2022. 2022 was a very tough year in terms of results. And one of the pillars of Hercules, pillar number six, it's about protecting or increasing our brand equity. And this is what we are having. Because without brand equity, you cannot have good revenue good revenue management, pricing, and sustain your bonds. And this is what we think you are investing for the long, long, long term. So adding up also the manufacturing expenses, we are practically flat in terms of expenses as percentage of net sales, overall accumulated net sales. to the year. So we will continue to support our brands while searching efficiencies. Also take into account that we have had high levels of inflation at the beginning of the year, now is more control. So for me, for us, we are just recovering the level of marketing that where we should be. Also the indicator of percentage of net sales although we have been doing very robust price efforts, has been a little bit diluted by mixed effects. So at the end, these mixed effects also contributed at being, you know, having an increase on this ratio.

Looks good. Thank you very much, Felipe.

Thank you very much. Our next question comes from Mr. Fernando Olvera, Bank of America.

Hi, good afternoon, and thanks for taking my question. The first one is related to Chile, returning back to volumes. Can you comment what was the performance by Chanel, you know, at beer and soft drinks, if there was a difference? And my second question, also in Chile, how are you thinking about your pricing strategy for next year? Thank you so much.

Thank you, Fernando, for your question. Regarding the split between beer and non-alcoholic, it was very similar. We decreased in Chile the volume around 5.7 percent, excuse me, 4.7 percent. This was the decrease in volume. was for, it was practically the same in non-alcoholic and beer. Because we are maintaining market share, so it was industry in both. You know, temperature affect both categories, non-alcoholic and beer, and the macro is affecting equally both categories. Also the mix is equally affected in both categories. So overall, that was the inspiration. And the second question was about, Claudio? About your pricing strategy for next year? Yeah, we have increased again prices so we are working on revenue management, always working in revenue management initiatives and looking at our promotional or promotional activities, but also we have increased price now in October in some categories, especially non-alcoholic given the prices that will not improve of some commodities, as I said, sugar and orange juices that are putting a lot of pressure in the P&L. So regarding for next year, we expect at least increase prices with inflation, at least.

Great. That's very helpful. Thank you so much, Felipe.

Okay. Thank you very much. Our next question, text question from Mr. Martin Zeche from Fundamenta Capital. Regarding prices, should we expect CCU to push increases north of inflation? Do you see space for that entering 2024?

Prices will depend on many factors. It will depend on input cost, as I said. Certainly non-alcoholic, we should go beyond inflation, even the input cost, especially in sugar, that is far enough. You know, for your reference, sugar prices are the double compared to 2019. So that is a lot. orange juice are more than double compared to 2019. So I, but it will depend on competition, it will depend on many factors, how our equity is, but of course, if there are opportunities to go beyond inflation, we will go for it.

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

Hello, Felipe, Claudio. Thank you. Thanks for taking my questions. I have two. The first one, you mentioned that you reduced portfolio complexity, right, in your remarks. If you could give a little bit more details on that in terms of, you know, which categories did that take part?

Hello. We lost you.

Hi, can you hear me? Sorry, I think we lost you for a second. Do you mind just repeating your question, please?

Yeah, sure. The first one is in terms of the portfolio complexity. That means that you wrote that it has been reduced. So just wondering if you could give more details in terms of the categories that it happened, how relevant this might have been for volumes, and if it's achieving the intended results you planned with it. And the second one on the beer industry in Chile, and this is more of a long-term one, but we saw very strong growth in beer volumes in Chile over the past many years. As you mentioned, Felipe, volumes, you know, they remain well above pre-pandemic. And when we look at per capita consumption, it's now approaching the levels of other markets that were more mature for beer consumption, right? So I just wanted to hear a little bit more from you in terms of how you see the beer industry performing in Chile in the long run, right? If growth, you know, should sustain the levels of the past or if it might be closer to antique.

Okay, no, thank you for your question, Martin. Enrique, Enrique. So regarding complexity, yes, the program is about to focus on high volume and high margin SKUs. So if an SKU has no right margin and is not providing enough volume, simply we delete. So we are deleting about 5% of the SKUs, and I think this, typically in this program, this should not have, especially an impact on margins. So, and we should run, we should have a lot of discipline, especially when with innovations. To evaluate innovation, if this provides, you know, better brand equity, Is this providing better margin? Is this providing better high volumes? Okay, you have an entry ticket to enter into the system, to launch it. But if you don't provide a strong additional brand equity, it doesn't provide additional volume, and it doesn't provide better margin, we will not launch it. So, That's in a nutshell what is about the complexity problems. We got a new question in here. Of course, as I mentioned to the first question, our levels of consumption are, you know, Hercules is about preserve the scale. And this is what we are doing. Because if I compare the accumulated volumes of the Chile operating segment, we are talking a very strong volume compared to pre-pandemic volume still. We think that the growth has slowed down or would be maybe in the next few quarters 0% growth. As I highlighted, quarter three was exceptional because of low temperatures. Okay, the weather, we cannot do nothing about the weather. But we think the consumer has reacted in a good way because do not consider that we have increased in Chile the prices more than 13%. Of course, we have a mixed effect on that, and thus the prices, the net prices only increased 10% because three points were lost because of mixed effect. But overall, the consumer is there, the consumption is there, and we are maintaining the level of consumption that we had last year. And also, you know, growing against 19. So if you took four years, 23, 22, 21, 22, and the base of 19, we are growing in beer and non-alcoholic exactly the same, 19.3% compared to 2019. So if you divided this by four years, more than GDP. So in times of economic disacceleration, still our products are in the wallet of the consumer. So maybe people will not consume other kinds of items, non-durable, but beverage, still the market is there.

That's very clear, Felipe. Thank you.

Okay, thank you very much. We have a question from Mr. Diego Guzman from BTG Pactual Asset Management. Please go ahead, sir.

Hi. Thanks for taking my call, my questions. I have two questions. You specified that you did price increases in October in non-alcoholic business. So I suppose maybe that this business has a better packing trend. But you also mentioned that cost outlook is a bit more pressured here. So mixing these two things, which one of the business do you think that has a better margin trend in terms of gross margin? maybe in the next six months or so. And the second question is regarding the non-operational expense. It's an operational expense in Argentina, but we see it in the non-operational result of 8,000 million pesos, something around that. Do you have maybe a... a payback of this or an intended rate of return or what is, I mean, can you explain us a little bit deeper what the economic or implications of this change?

Thank you.

Okay. There is someone that has an open mic. Okay, thank you. So your first question, if I understood, was about prices. Yes, as I said, Non-alcoholic will have more pressure because we have more commodity price pressure from non-alcoholic commodities such as sugar and especially orange juice. Our beer business has better margins than the non-alcoholic. Maybe beer, although beer is more linked to the U.S. dollar, So we expect that at the end, both categories of course require at least inflation, but non-alcoholic request more than inflation price increases to compensate this cost pressure. Regarding the non-recurring expenses in Argentina, This is related to the integration of the Danone water business into our sales and distribution network. So this is a non-recurring effect, as you highlighted, up of approximately $10 million. This is the impact of our P&L. It's non-operating because it's It's a JV that do not consolidate and thus it has an impact in our non-operational results. Regarding the payback of that is very clear. It's adding to our network between 5 million hectoliters more or less of volume that certainly will provide us a better scale in Argentina in the future. And especially in very difficult times in Argentina, it's very good to synergize both distribution networks, the one that we have for beer and the one for water. This was an acquisition that we did last year, and then now this year we come to a very successful integration of both business, not only in sales and distribution, but also in head office, in financial services and other overhead function. So would provide us, you know, a stronger P&L in Argentina, okay?

Just to be sure, you mentioned that both businesses will try to be around inflation, maybe non-alcoholic above, but which business do you see has a better trend in margin normalization, beer or non-alcoholic?

You know, that's no big difference this year. I think... because we had last year, you know, very high aluminum prices on the one hand that affect the beer business, very high resin prices that affect the non-alcoholic business, very high malt prices. So at the end, I think as of today, Both business are in the same range of normalization in terms of on average. The point is looking forward, but always it's an estimate, you know, but given what we had on the table, which are the commodity costs, certainly the non-alcoholic business has more cost pressure than the beer business.

Thank you.

Okay, thank you very much. Our next question comes from Mr. Carlos Laboy from HSBC Security. Please go ahead, sir.

Yes, hello, everybody. I was hoping you could give us more insights into how things are going in Colombia, market share, not just the island trends, market share, how your brands are doing in the marketplace, et cetera.

Yeah, regarding Colombia, we do have maybe a little reduction in the first semester in terms of market share. However, recovering, especially in the last few months, especially in September, we are being recuperating margin also because of input cost again. We have a very tough situation in input cost in 2022, but along the time it's been recovering this. So still there are work to do, especially in enhancing our brand equity of our brand, in Ambina especially. And also the other thing that is important improve our But the last silence on the last quarter especially in September in terms of market share are very encouraging.

Thank you.

Okay, thank you very much. Just a reminder, star two for any additional questions. We have a follow-up question from Mr. from Scotiabank. Please go ahead, sir.

Thanks, operator. Yes, Felipe, if I could do just one more. Just wondering if you could comment a little bit on what's going on in wine and what you expect going forward. Obviously, there's been a lot of pain, and it's not just pain for CCU. It's industry pain with destocking and wholesale channels around the world. But just wondering if you could give us your take on how you think the next few quarters will evolve for wine. Thank you.

Yes. It's an industry pain, as you highlighted. Due to this talking, I will not repeat myself of previous dialogues that we have had on this. But I would be a little bit more optimistic now because the export, because especially in exports, in the first semester of the year, our export volumes from Chile decreased 19%. which was better than industry, but it was a bad 19%. In the third quarter, the reduction was 14% of which is better. But what is good is that now in October, we have for the first month in the year increased by mid single digit our export volumes. So it's the first positive month of the year. So going forward, we expect a recovery in terms of growing since the stocking should stop, let's say. On top of that, we are working on brand preference a lot. We are working on enhancing our relationship with distributors. Also, our commercial offices that we have in the US, in China, and in the UK, should enhance our commercial effectiveness in those markets. So maybe it's too early to call Felipe, but we have had good news in October in terms of also in the third quarter as we decrease less than the first semester. And the first positive final in October. Going forward, we should expect finally a recovery in terms of volume.

That's very clear. Thanks a lot.

Okay, thank you. We'll just give another couple of seconds for any additional questions to come in. Okay, it looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.

Thank you. Thank you to all for attending today. During Quarter 3, 2023, we continue making progress to recover our financial results and profitability in a challenging and volatile economic context. Our initiatives under Hercules are showing positive outcomes through the year, allowing us to recover our operational results hold business scale and market shares, improve margins, and strengthening especially our cash generation. Nonetheless, we are aware that more efforts are needed to improve profitability further, especially when the business scenario will remain challenging. In order to do so, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you a wonderful day.

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