Compania Cervecerias Unidas, S.A.

Ladies and gentlemen, good day and welcome to CCU's fourth quarter 2023 earnings conference call on the 28th of February. Today's conference call is being recorded. At this time, I would like to turn the conference call over to Claudio Las Jarras, the head of investor relations. Please go ahead, sir.

Welcome, everyone, and thank you for attending CCU's fourth quarter 2023 conference call. Today with me are Mr. Felipe Gubernet, chief financial officer, and Mr. Joaquin Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated four-quarter 2023 results. Felipe will review our overall results, 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 call that relate to CCU's future performance or financial results are forward-looking statements which involve known and unknown risks and uncertainties that could cause actual performance or results to materially differ. This statement should be taken in conjunction with the additional information about risk and uncertainties set forth in CCU's annual report in Form 20-F 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 our CFO, Mr. Felipe Adubeme.

Thank you, Claudio, and thank you all for joining us today. During 2023, we posted a recovery in our operating results and profitability in spite of a volatile business environment, a particularly difficult year for the wine export business, and Argentina's macroeconomic conditions. Our consolidated EBITDA in the year grew 6%, and the EBITDA margin grew 159 basis points, driven by our main operating segment, Chile, which expanded EBITDA by 24.8%, more than offsetting a 37.4% drop in the wine operating segment and a 16% percent contraction in international business operating segments, which includes Argentina. Consolidated net income contracted 10.6% versus 2022. The driver for the better operational result was the execution of our regional plan Hercules, which encompasses six pillars. Number one, maintain business scale. Number two, strengthen revenue management efforts. Number three, deliver efficiency gains through our transformation program. Number four, optimizing CapEx and working capital. Number three, focusing on core brands and high volume margin innovations. And number six, continue investing in our brand equity. I would like to briefly mention some of the highlights of the year for each pillar. In terms of pillar number one, consolidated volumes in 2023 were 3.4% below last year. mainly driven by lower consumption in Argentina throughout the year, a tough scenario for Chilean export, and a deceleration in volumes in Chile during the second semester. Nonetheless, we maintained relative scale by keeping increasing market shares in our main categories. As for pillar number two, we executed revenue management initiatives in all our geographies. especially noticeable in Chile, where average prices increased 7.9%, being key to recover margins, offsetting cost and expenses pressures, and negative mixed effects. Regarding pillar number three, we were able to deliver efficiencies during the year, as total expenses, including manufacturing costs and MSM DNA as a percentage of net sales, were stable at 47.7% in 2022 and 2023. In terms of pillar number four, we recovered our catch generation, mainly due to a reduction in working capital versus 2022, capex optimization, and a higher EBITDA. Finally, in line with pillar number five and six, we reduced the number of SKUs following us to focus in core brands and profitable innovation, reducing the complexity of our operation, and we posted solid levels of running risk. From a quarterly perspective, consolidated EBITDA dropped 9.9% and EBITDA margin was up from 16% to 19.3%. In this quarter, it is important to mention that the chart devaluation of the Argentine peso against the US dollar generated a material impact in our results in quarter four, 2023. The Argentine currency jumped 131% the exchange rate from 350 Argentinian pesos per dollar as of September 30, 2023, to 808.5 Argentinian pesos per dollar as of December 31, 2023. Thus, as Argentina is under hyperinflation accounting, according to the IAS 29, accumulated results in Argentina as of September 30, 2023, are updated to prices and exchange rate levels to the end of the period. This generated a loss in the quarter of 24,018 million Chilean pesos in consolidated EBITDA, of which 22,800 and 4 million Chilean pesos are accounted in the international business operating segment, and 1,215 million Chilean pesos are accounted in the wine operating segment. Excluding these effects, consolidated EBITDA in the quarter would have expanded 3.4% versus the same quarter of last year. In terms of the segment, in the Chile operating segment, top line decreased 2.2% in the last quarter, due to a 7.3% contraction in volumes, partially compensated with 5.5% higher average prices. Lower volumes were mostly related to a weakening demand, which was especially affected by weather conditions, while prices were driven by revenue management initiatives. EBITDA increased 20.9%, and EBITDA margin improved and expanded from 14.2% to 17.5%. In the international operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales dropped 90%, mainly as a result of a contraction of 89.4% in average prices in Chilean pesos, due to the impact of hyperinflation accounting states above, as prices in local currency evolved in line with inflation. Volumes contracted 8.3%, fully explained by Argentina, as all the other geographies posted positive volume growth. EBITDA contracted 53.7%. In the wine operating segment, revenues were down 11.7%, mainly explained by an 8.8% decrease in volumes. driven by a 10.2% decrease in the Chile domestic market and a 5.6% contraction in exports from Chile. Average prices contracted by 3.1%, also due to the impact of hyperinflation accounting states above, in our wine business in Argentina, and a stronger Chilean peso against the U.S. dollar, which impacted negatively our export revenue. Partially offset by revenue management initiatives in our domestic markets, EDIPTA decreased 21.3%. Regarding our main JVs and associated business from a yearly perspective, in Colombia, volumes contracted low single-digit in 2023 in a scenario of weaker consumption. In Argentina, our water business recorded mid-single-digit growth in volumes despite the complex economic environment explained by the strength of the brands and the successful route to market integration of this business into our operations. 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 Q&A part of the call. If you have a question, please press star two on your keypad. That's star two on your keypad for any voice questions. We will give a minute or so for any questions to come in. Okay, the first question we have is from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir, your line is open.

Thanks, operator. Good morning, Felipe, Joaquin, and team. Thanks for the space. So my first question is on Argentina. Obviously a messy quarter, all the hyperinflationary accounting effects, you know, kind of muddy up the quarter. But how did the quarter start for Argentina in 2024? How are things looking there? And then if I can, I'll do a follow-up. Thanks.

Thank you, Felipe, for your question regarding Argentina. The quarter maintained exactly the same trend as we had in quarter four. So we continue to increase prices in line with inflation. Inflation level during January was 20.5 percent in Argentina. This is public data. And we are experiencing industry contraction of, let's say, high single digit, let's say during January, for the time being. It is expected that we will have a lower level of inflation in Argentina in February. We do not have official data, but we will continue our revenue management efforts there in order to keep profitability in Argentina.

Great, great. Before I move to the next question, Felipe, great comments on how the consumer is doing. Let me ask you, do you expect kind of margins to deteriorate as you eventually have to adjust employees in Argentina, or what type of margin environment do you expect as the year starts?

Look, I will not give you a poor look, but in Argentina, all the pillars of Hercules are completely valid, let's say. Of course, we would like to maintain business scale, but it would be difficult given the macro environment. But at least relative scale we are maintaining thanks to our portfolio ended up in a very strong way, let's say. So the relative scale would be maintained. The big answer would be, let's say, how much the industry would suffer. The good news is if the government plans works in terms of having lower levels of inflation, maybe we could experience, let's say, some relief in terms of the contraction of the volumes. But all the pillars are towards, let's say, not suffering in profitability terms. Let's say we'll continue revenue management efforts there, as I pointed out. Efficiencies are key. A number of projects in several areas, logistic, manufacturing, in terms of expense control, are very valuable. Also, taking care of the cash is important, of working capital, inventory reduction. we have, in fact, reduced our inventory levels, let's say, to work with less safety in terms of reacting, of course, maintaining flexibility towards the market, but in a more efficient way. Also, portfolio rationalization is something important. Enhancing also investing behind returnable packaging also is a way to protect our profitability. And, of course, Because all of these need to be possible thanks to our high levels or good levels of brand equity to continue to invest behind the brands. Because without a stronger brand, it would be very difficult to maintain our relative scale.

Very clear. Thanks very much for that. Maybe if I can do a second one on Chewy. weather seems to have been a factor in the quarter, and I think your peers reported exactly the same thing. So I'm wondering, how did results look if you kind of didn't have the weather effects? And what I mean is I'm trying to gauge how the consumer is doing if you put aside the weather factor.

Oh, that's very difficult to say. I asked for, we need an algorithm for that, you know. Of course, we have some internal algorithms, but it's how much. So I think there is a weaker demand itself in the consumer. The consumer is not in the same shape as it used to be in 2021 and beginning of 22, period. We know that. We have had two bad quarters. quarter three and four in terms of not good weather conditions for selling, you know, refrigerated drinks, let's say. The majority of our portfolio need to be drink in, of course, was unfavorable in terms of rain, in terms of temperatures. Factoring out the weather would be, we decrease 7.3%. I will not attribute 100% to the weather, but I don't have a number to provide to you, exact number to provide to you, how much the weather would influence on this decrease in volume. It would be difficult. Maybe an indicator could be quarter one, but we have had more stable weather in terms of temperatures, but still it's too early to call the quarter one. January has started in good shape with low single-digit growth because we have a more normalized weather. But certainly, as I mentioned in previous conference call, without giving you future forecasts, because it's difficult on that, because there are several factors, risk and uncertainties. I think low single-digit between need and low single-digit should be the growth if you take out the weather. And it's aligned with GDP in Chile.

That's super helpful, especially the comments on January. That helps us a lot. So thanks for that, Felipe. I'll hand it back to you. Thanks.

Thank you very much. We also acknowledge the text question from Mr. Pablo Bello from BTG, which we believe was answered, this question and this answer about Argentina. The next voice question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.

Hi, good morning. Good afternoon. Thanks for taking my questions. I have two. The first one is related to Chile. If you can comment, what is your outlook on cost and how effects will play in coming quarters? And if you can share some color of how margins should behave this year, particularly in Chile. That's my first question and I have a second one. Thanks.

First of all, Pablo, I already answered the question regarding Argentina to Felipe. Anyway, thank you for your question. Fernando, of course, you pointed out the main risk that we are facing nowadays in terms of effects. Today, the US dollar is 980, which is much higher than what we saw in the previous quarter. And we have, you know, a pressure on that in terms of cost. For example, last year, U.S. dollar was, its average share rate in Chile was 839. Now we are, let's say, more than 100 Chilean pesos more. So this is more than 10%. And this would have certainly an impact in our P&L, in our cost structure. Although commodities are stable, with the exception of sugar, let's say, but commodities are stable, what we need to do at the end is to compensate that in order to have more stable EBITDA margins. And we need to enhance our revenue management efforts, enhance our efficiency efforts also, to speed up some projects that we have in terms of efficiencies and improve mix. Also, it's a way to compensate this pressure in terms of the US dollar. And this is fully aligned with Hercules. But you pointed out that is one of the risks that we are facing.

OK. Great. Felipe, and my second question is related to your SKUs reduction. If you can comment about that to give us an idea of how many SKUs you eliminated in 2023. Any idea of how this favored your profitability and if you are going to continue with the SKU reduction this year? Thank you.

We took out of our offers, about 100 SKUs, but this does not represent. It should be in terms of percentage about 5%. But the idea is not reducing all the time you do tackling the tail, let's say, SKU reduction, but the incentive of that is to really, if we need to launch something or to do an innovation, it should be relevant should have better margins, should improve the brand equity of the category, of the portfolio, improve brand equity, deliver higher margins, and also improve volumes. So at the end, it's an exercise that we should, it's about discipline on that.

Okay, great. Thank you, Felipe.

Okay. Thank you very much. Just a reminder once again, star two for any additional questions. Our next question comes from Mr. Ulises Bolio from JP Morgan. Please go ahead, sir.

Hi, you guys. Thanks so much for the space for questions. A couple of follow-ups on my side. So first on the Chile volumes, can you provide a little bit of detail? How was the performance there on the alcoholic versus non-alcoholic? Um, and maybe a double click there on how those more premium beer categories continue to, uh, to perform there. Um, and then the other one on, on effects, uh, just wanted to, to, uh, to hear your thoughts, uh, more or less what is kind of being embedded in your budget in terms of effects for the year. Um, and what are you thinking in, in terms of the pricing that you need to do to, uh, to kind of offset this pressure? Thanks so much.

Yes. Regarding your first question, volumes in quarter four were exactly very similar, both non-alcoholic and beer. No big difference in terms of decrease for both. So we are talking about between mid to high single digit, let's say. Overall decrease in volumes in Chile was 7%, so it was very similar across the board. Regarding effects, yeah, we will have a significant effect on this. More or less 70% or 75% are linked to the US dollar of our direct costs, raw material costs, packaging material costs, and also energy costs. So we need to do efforts in revenue management certainly to compensate because every, let's say, 10 pesos of devaluation, more or less, is about 2,000 million pesos affecting our EBITDA being compensated by, that are already compensated by the export business. So this is net of the export that we have in wine, especially, that compensates some work at the consolidated level. So if you have a sustained 100 pesos, so we need to deliver in our P&L, you know, extra 20, 25, between 20, 25,000 million pesos. So this is a significant number if you look at the at the total EBITDA of Chile. So it should be a combination of tools, let's say, revenue management, efficiency, cost and expense control, so something in order to have stable margins, let's say.

Okay, thank you. That is very clear. And then just on that FX question, are you able to share more or less what you are budgeting in terms of that, like for your plan for 2024? What kind of FX are you using? And then just to have that as maybe a kind of a benchmark of what we should be thinking about in that sense and the impacts on costs.

Oh, thanks. I'm not an economist, I'm not a methodologist, so I cannot predict weather, neither exchange rate. I would not like to do a prediction on exchange rate. I can give you current exchange rate, okay? This is the best prediction you have, the current one. And maybe you could look at Bloomberg to the futures of the Chilean peso. So current exchange rate is 960. I will ask Joaquin now, how are the predictions of the U.S. dollar, how much?

Yeah, it's like that.

Today's pot price is $960. A year ago, or no, average of last year was $840. So it's a pressure we're seeing right now. And it's a pressure that has increased since January.

Yes. Yeah, all right, no, I think that's fair enough. So, yeah, I was kind of putting you in a tough position there, but understood. Thanks so much for the call there, guys.

Okay, thank you very much. We have a follow-up question from Mr. Felipe Ucos from Scotiabank. Please go ahead, sir.

Thanks, operator. It seemed there wasn't anybody else on the queue. I thought I'd take advantage and ask another one, Felipe, so thanks. I know wine is not the largest segment So it might be unusual to ask about this one. But strategically speaking, it's the segment that seems more challenged in the long term. Volumes have been falling for the larger part of the last few years. And I know it's not a CCU problem. It's an industry problem. We've seen it across wine throughout the world. But just wondering if there's a plan to kind of turn around that dynamic or kind of offset that decline in wine consumption. Anything you guys are thinking of to improve performance in that segment?

Yeah. Thank you, Felipe, for your question. Of course, we suffered a terrible 2023 in the wine export industry, not only Chile, but also Argentina. I saw some numbers yesterday of decrease of Australia exports Chile exports. So I think there are factors that are related of the carrying inventory units of places that are far from consumption centers. So there is something of the economics of the export that has an influence and even the interest rate that especially in the U.S. has not reduced yet. the Fed interest rate, still we are less competitive in terms of carrying out inventory costs. So, we experienced this in 2023. Now, what I would say, we are seeing, you know, some greens, let's say, green grass or some embryonic good signals in terms that we expect, at least in the first quarter, to have some growth in terms of the exports volume. As you pointed out, there is a global industry in terms of volume that is decreased, but there are some tools that we need to look at. So, of course, premiumization is something Innovation is a category that needs innovation. We are innovating a lot, especially in the domestic market in Chile, through brand extensions, sweet wine, in order to maintain the scale, especially in the domestic market. Also sparkling wine is doing very well. In the exports are more complicated because you have, as I mentioned, we have some constraints there because it's difficult, a global branding. No one has, there are a few that have really global branding in terms of wines, country by country, region by region, so it's different. So what we are working in order to make it more profitable is and to sustain the scale, even growing in some markets, is through improving our execution. And it's all about execution, especially in some key markets. We opened a commercial office in China, also in the US, and in the UK. So with these three, let's say, new endeavours,

we think we we would significantly improve the execution in those markets that's very clear thanks uh thanks so much for the call okay thank you thank you very much um our final question is a text question from mr alessandro conti from jeffries um are you planning on initiating Cost cutting initiatives, especially in Chile, do you see any foreseeable improvement in margins?

Cost cutting seems a little bit aggressive, let's say. I would say cost control to make with the same resources better and more. But of course, our efficiency plan is in place in terms of improving expenses The key indicator are expenses over revenues, and thus we need to reduce that in the long term or in the medium term and also this year. So we have plans for that, especially at the expense level. In costs themselves, it depends a lot on the market, the exchange rate, the direct cost of referring raw material and packaging materials. So, of course, it's a key pillar, pillar number three in terms of efficiency in order to keep the pace with this game. If this would be reflected or not in the bottom line, it would depend on other factors, let's say. But The priority is one key pillar of Hercules, our efficiencies.

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

In 2024, we will continue working under our three strategic pillars, growth, profitability, and sustainability, and we will keep and we will keep implementing Hercules. We know that the environment in the region will continue to be challenging, especially in Argentina. Nonetheless, we expect to be able to continue on the recovery path of our financial results and profitability. Finally, I would like to thank all our employees. Given their hard work and commitment with CCU, we have been able to navigate challenging years. We will continue working united to sustain a path of profitable and sustainable growth. Thank you and have a wonderful end of the day.

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