Compania Cervecerias Unidas, S.A.

Good afternoon, everyone, and welcome to CCU's second quarter 2024 earnings presentation call on the 8th of August. Please note that this call is being recorded and all participant lines are on listen-only mode. After the presentation is completed, there'll be an opportunity to ask questions. So without further ado, I would now like to pass the line over to Claudio Lázarez-Olivares, Head of Investor Relations at CCU. Please go ahead, sir. Welcome, everyone.

And thank you for attending CCU's second quarter 2024 conference call. Today with me are Mr. Patricio Jota, Chief Executive Officer, Mr. Felipe Duvernet, Chief Financial Officer, Mr. Joaquin Trejo, Financial Planning and Investor Relations Manager, and Carolina Burgos, Senior Investor Relations Analyst. You have received a copy of the company's consolidated second quarter 2024 results. As usual, Patricio will now review our overall performance and we will then move into a Q&A session. Before we begin, as usual, we take notes of our cautionary statements. Statements made in this call that relate to CCU's future performance or financial results are forward-looking statements which involve known and unknown reasons 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 file with the U.S. Security 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. Patricio Jotaro. Thank you, Claudio, and thank you all for joining us today. In the second quarter of 2024, CCUs financial results were much weaker than last year, as they were heavily impacted by two effects, a particularly difficult context for demand in Chile and Argentina, and the depreciation of our main local currencies. The industries of our core categories, particularly beer, decreased, largely explained by adverse weather conditions with unusual low temperatures and record rainfall during the quarter, particularly in May and June. In Argentina, we faced a sharp contraction in the economy and in the beer industry, associated with a challenging context for consumption. It's important to mention that we maintained overall market share in both countries. In terms of our main local currencies, the Chilean peso and Argentine peso depreciated 16.8% and 255.1% against the U.S. dollar respectively, increasing our U.S. dollar denominated costs, impacting our operating results. In this scenario, under original plan Hercules, Further actions in terms of revenue management and costs and expenses control are currently in place. These actions in a more normalized context of volumes growth should help us to return to the profitability path. In the second quarter of 2024, our revenues contracted 8.6%, fully explained by 12.7% volumes dropped, partially compensated by 4.6% higher average prices in trillion pesos. Lower volumes were largely caused by a weaker demand in Chile and Argentina as I explained before. Average prices were higher due to revenue management initiatives in all operating segments. Gross profit was down 15.8% and as a percentage net sales deteriorated by 338 basis points due to higher cost pressures, mainly coming from depreciation of the Chilean peso and the Argentine peso mentioned above. MSDMA expenses expanded 1.7%, and as a percentage for net sales, deteriorated 464 basis points, mainly as a consequence of lower volumes and its negative impact in fixed expenses deletion. In all, EBDA reached 10,053 million Chilean pesos, a 78.7% decrease, and EBDA margin contracted 629 basis points, Net income reached a loss of 15,888 million Chilean pesos. These figures do not consider the non-returning gain from the sale of a portion of land in Chile, with a favorable effect before taxes of 28,659 million Chilean pesos, and after tax of 20,928 million Chilean pesos. Including this non-recurring effect, EDTA totalized 38,722 million kilonewton pesos, and net income reached a gain of 5,040 million kilonewton pesos. The following analysis also does not consider these non-recurring events. In the field operating segment, top line contracted 5.5%. driven by 8.4% volume drop, partially offset by 3.1% growth in average prices. Volume contraction was caused by weaker demand due to unbearable weather conditions in the quarter, particularly in the beer business. Nonetheless, we saw much better performance in July, being a good sign for volumes looking ahead. Average prices were highly driven by revenue management efforts in all our categories, partially offset by negative mixed effects in the portfolio. In this regard, in July, we implemented additional price actions. Gross margin decreased as a result of high cost pressures, largely coming from our U.S. dollar denominated costs. MFDMA expenses were flat. due to efficiencies that fails to compensate higher US dollar denominated expenses. Consequently, EVGA totalized 26,587 million trillion pesos, contracting 39.7%. In international business operating segments, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded 22.1% drops as a result of 37.2% reduction in volumes, partially offset by 7% rise in average prices in Chilean pesos. Weaker volumes were mostly concentrated in Argentina. On the other hand, Paraguay and Bolivia expanded volumes by little white drops due to a high comparison base explained by an uncommon draft in 2023, which boosted package water consumption in that year. The better average price in Chilean pesos was driven by revenue management efforts in all the countries, partially offsetting strong cost pressures, mostly coming from the sharp depreciation of the Argentine peso against the U.S. dollar and its impact in U.S. dollar's denominated costs. Consequently, gross margin deteriorated from 46% to 37.5%, and as DNA expenses increased 3.3%, and as a percentage net safety rate is mainly due to the lower business scale in Argentina. Altogether, EDA rates a loss of 24,372 million Chilean pesos. The wine operating segment continued in a recovery trend with revenues expanding 12% driven by 11.9% higher average prices. Volume showed a strong recovery in exports from Chile which expanded 9.1%, while the Chile domestic market was down 5.4%. The better average prices were boosted by the weekly Chilean peso, and its federal impact on export revenues and revenue management initiatives in our domestic market. Gross profit rose 28.5%, and gross margin improved 511 basis points. MSDNA expenses increased 12.4%, mainly due to higher market expenses related to exports which are denominated in U.S. dollars. And as a percentage of net sales, we made floods. In all, EBITDA increased 59.2%. Regarding our main joint ventures and associated business, in Colombia, volumes increased mid-East. driving better financial results. In Argentina, our water business recorded a contraction in volumes due to the challenge scenario for consumption. Nonetheless, financial results improved versus last year due to efficiencies from a successful route to market and back office integration with CCU Argentina. 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 and are dialed in by the telephone, please press star two. That's star two for any questions. You may also ask a voice or a text question if you are dialed in via the web. Okay, we'll now give a moment or so for questions to come in. First question comes from Mr. Tilipe Ukros from Scotiabank. Please go ahead sir, your line is open.

Good morning, Patricio and team. Thanks for this case. A few questions on my side. Maybe start with the first one on weather. You discuss in your release and your remarks that weather had a little bit to do with the poor volume performance in beer and non-alcoholic beverages. But in my mind, when it's cold and the consumer drinks less beer and non-alcoholics, maybe the consumer drinks more red wine. But the results locally show that in wine, Chile was also negative. So just wondering if you could comment on how those weather effects move the portfolio and whether we should consider that there's more pressure from generalized consumption rather than weather, or if you think weather was a bigger effect here. And then I'll do a follow-up. Thank you.

Thank you, Felipe, for your question. Look, if we double-click the volumes in the domestic we find differences among the different categories. In fact, while we're keeping market share in general terms in the different categories, so the figures of CCU represent the figures of the industry. In the case of beer, I mean, the whole tiered segment to decrease by 8.4 percentage volumes as I mentioned before. But there are differences, the case of beer, the decrease was in the mid-teens, while in the case of non-alcoholic, the decrease was mid-single digits. So something like 5% in the case of non-alcoholic, something like 14% in the case of the others. So as you could see, very strong difference in both cases, we are keeping market share. You're right, when the weather is not good, wine and spirits benefit from this. In fact, the volumes of spirit decrease by something like 5% and the volumes of wine domestic market, I mentioned it in my introduction, something like 5% also. May and June were extremely, extremely bad in terms of temperature and in terms of rain. In fact, the temperatures on the second quarter, particularly May and June were the worst in the last 20 years, and rain by far the worst in the last 20 years, making a strong effect, particularly in India, which is very sensible on temperature and weather, and creating or producing an effect also in the other categories, but not as much as in the case of beer. Looking forward, we don't know what is going to happen with weather, but of course, we assume that weather is going to be normal. Not hot, not cold. July was a very normal month in terms of temperature and in terms of rain. Average on the last 20 years and volumes we assume some growth, not too much, a single digit, 2%, something like this, 2% to 3%, which is normal in an economy which is not performing well as the economy of Chile. So we feel comfortable regarding the future, regarding volumes. And again, we think that May and June, particularly in Q2 2024 were extremely, extremely extreme because of the conditions I just mentioned.

Great. Thanks for the clarity on that. And my second question is on competition. Last quarter, I asked about the rationality in the market and asked if your competitors were moving prices with inflation. And it seemed that they were not moving at the speed or at least not the same magnitude as CCU. You announced in your release that you increased prices in July. Have you seen your competition follow you this time around?

Look, Felipe, I think that there is a lot of rationality in our market, and it happens that the pressure on direct costs have been tremendous. I mean, if you take a longer period of time, let's say 2019, 2024, our direct costs have increased in non-alcoholic by 66, 68%. And we have been able to increase price in line of inflation a little bit less in the case of beer, a little bit more in the case of non-alcoholic, but we have not been able to catch up with the enormous pressure on the direct cost. So we need to continue making efforts to improve prices, to recuperate margins, and we are moving in that direction, and the industry as a whole is moving in this direction.

Okay. That's clear. Any indication that your competitors have followed after the increase in July?

I mean, I prefer not to double-click on the extremely short term, but I would like to say that the industry as a whole is facing the same pressures on direct costs and is moving in the direction of recuperating margin. In fact, it's not just in Chile, it's all over the world. But I prefer not to discuss on what is happening today in the market. But they remain positive on our ability to recuperate margins. Let me say this.

Got it. Yeah, it's a very short term to kind of gauge that. Last question on Argentina and shifting to other topics. It's been a few quarters since you left the Coke distribution system in Argentina and you started using your own. Just wondering if you can give us an idea of how smooth the transition has been and whether you're happy where you are on that distribution today.

Look, we're extremely happy. We made all the We made all the integration of the distributions in August, September, October 2023. That was very important for us because, as you probably know, 22% of our beer volumes in Argentina were distributed by the Coca-Cola system. And we wanted to have control of our 100% of our distribution. By incorporating... in our distribution, we created enough critical mass to have our own distribution system in all the territory. And today we do not depend on the distribution of Coca-Cola in the South and in some parts of the North of Argentina. It was very smooth. We reduced a lot of full-time employees. We reduced a lot of distributors. This is 100% paid in our P&L of 2020. And the results are extremely good and satisfactory. We are very happy on our ability to run a joint distribution, putting together today beer, wine, cider, and water. And we're extremely happy with this. Particularly in the case of water, we are running at a positive VDA and positive net profit In the year, the water business, we're not consolidating this. We expect to consolidate beginning August or September 2024. I mean, this month or next month. We're not consolidating this, but while we consolidate, we expect to have positive EVGA and positive net profits, mainly because we transform all the fixed costs of the water operation into variable costs. by incorporating it in our platform. Happens that the year 2024 in terms of volumes for the categories in Argentina is extremely poor. I mean, the beer category is decreasing its volumes by 30%. The water business or the water category, same thing. We are keeping, roughly speaking, our market shares there, but when volumes decrease by 30%, everything in terms of results becomes very extreme. And this is what we are facing. We don't know when the consumption patterns are going to change in Argentina, hopefully in Q4 2024. This is what we expect. We don't know. But in the meanwhile, we are capturing, again, all the efficiencies of having just one distribution network.

That's very clear. Thanks so much for that call.

Thank you, Felipe. Thank you very much. Next question is from Mr. Pedro Seixas from Nuremberg, Burman. Please go ahead, sir. Hi, Mr. Pedro. Your line is open in case you are muted. Okay, we'll come back to Mr. Pedro Seixas in a moment. In the meantime, we'll take Mr. Alvaro Garcia from BTG Pactual. Please go ahead, sir. Your line is open.

Hi, Patricio. Thanks for the space for questions. I really appreciate it. A question on Colombia, the volumes there were quite strong relative to how the economy is doing. I was wondering if you can comment on initiatives in Colombia for that, JV. And then just to follow up on Argentina, you mentioned share was stable. I was wondering if you can comment if that was volume share, value share. My sense is if you maybe lag on pricing now, and gain volume share, you could be in a much better position coming out of the crisis. But any clarity there would be very helpful. Thank you.

Thank you, Alvaro, for your questions. Regarding Colombia, yes, it's true. We are growing our volumes by 50%. We're gaining a little bit of market share. And, I mean, we make public the results in terms of net profits. But BBVA is being positive. year-to-date and we expect to have a much better result in the last part of the year because most of the volume comes on October, November, and December. I mean, it's tough. It has been tough, our project in Colombia, but we're moving in the right direction and we're very happy on this. Regarding Argentina, yes, I mean, our volumes and our market share in terms of volumes and in terms of value are in the same direction. Looking in 2023, our prices will increase by 11% more than inflation, 10 or 11. And if inflation is 200%, it's very difficult to know exactly or to compare exactly your price with inflation. But let's say that we gain a little bit, or we took a little bit of advantage on inflation. In 2024, we are losing, six or seven points compared to inflation. So if you put together 23 and 24, we are three points above inflation. The industry as a whole is moving in the same direction, but it's not a good idea to decrease prices in order not to lose volumes, because if you do this, at the end of the day, it's going to be extremely difficult to recuperate prices. I prefer to move prices in line with in line with inflation and do our best efforts to keep our scale and trust that the economy will resume normality and growth. We expect sooner than later, but it's really very difficult to know when it's going to happen.

That's helpful. Thank you very much.

Thank you. Okay, thank you very much. We'll go to Mr. Pedro Seixas Nuremberg-Berman. He types his question. I was wondering if you could elaborate on how much exactly did the FX fluctuation impact the 78% drop in EBITDA? How much of the 78% was to do with the FX depreciation and how much was to do with the volume decline? Thank you.

We have the precise calculation. I will ask Felipe to So I will ask Felipe to give you the right figures Pedro. Thank you Pedro for your question. At the consolidated level, our EBDTA reduced from 47 billion pesos last year second quarter to 10 billion pesos the second quarter of this year. So the difference 37 billion Chilean pesos. Of these, the external effect, as we call, so that's the combination of exchange rate in Chile, so the Chilean peso depreciation against the U.S. dollar, offset somewhat due to some positive effect on raw material cost in U.S. dollar. This affected in total about 16 billion pesos in a negative direction. So this was the sheet of our results in quarter two by exchange rate somewhat compensated with better prices in PEP, aluminum cost, and mold cost. On the other hand, all our operating variables such as price, that was positive, was positive, but not enough to compensate the input cost. volume very negative, we reduce the volume overall at the consolidated level by 13% and compensated with some efficiencies, especially in logistics. The impact of this operating result was about 21 billion pesos negative. So the main causes of the EBITDA decline were due to first, external effects about 16 billion pesos and volume offset somewhat by price and efficiencies of about 21 billion pesos negative. That is the breach of the EBITDA.

Okay, thank you very much. Once again, star two for any additional questions. We'll open, Nicolas Genozo, we did notice your question from your line. In case you have a question, your line is open. Nicolas Genozo from Compass Group Asset Management. Okay, so just once again, star two for any additional questions. We'll give a moment or so for any additional questions or any follow-ups. Okay. We have a question from Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.

Hi. Good morning, and thanks for taking my question. My question is related to cost. If you can share what is your outlook for the remaining of the year, you know, given that packaging and sugar costs are down, although the Chilean peso has depreciated, you know, versus the U.S. dollar. And I have another question, but I'll wait.

Yes. Thank you, Fernando. We'll ask also Felipe to discuss on cost of raw materials and what we expect for the next, for the rest of the year. Thank you, Fernando. Thanks. In terms of raw materials and some water, you are right, the sugar has been softened a little bit, but still is higher than last year. So we continue to be higher. And we saw a better outlook in the futures the last time. The other downside that we have in raw materials for higher cost is pulp. You know, orange juices are at a record highest cost, especially due to Brazil. For the rest, it's the same trend that we have. I think they would be stable. So what is more unstable and very difficult to give you an outlook because, I don't know, in the last two months, the Chilean pesos moved from high 900, let's say close to 1,000, to below 900. So this week also was especially volatile in line with the overall market. So it's difficult to predict. So I prefer not to give an outlook. We use in our projections 940, but at the end, if you go into Bloomberg, you will find a full array of projections. Also remind that INCI is very sensible to copper, to copper prices. So not only how the financial markets move or how the Fed rates would move going forward, but also on copper prices. So difficult to predict. So this is the reason why we took actions in terms of prices, because all the market, all the players, we are facing the same input cost pressures. And we think that would continue towards the end of the year. We don't see nothing better of what we have seen in the last quarter. So that's important to understand. to work on revenue management and price.

You highlighted in the press release that recovering profitability is your short-term priority. So can you share what additional measures are you already implemented or you are about to implement to recover margins and how do you envision all this recovery and margins.

Indeed, it's our short-term priority. I mean, long-term, you need to move three pillars to build up a good business in the long-term. You need to move the pillar or to work in the pillar of profitability, growth, and sustainability. And, of course, we put emphasis on these three pillars, growth, profitability, and sustainability. Having said that, The priority for the next six months and the priority today. Expenses, number one, we have our plan devoted to be much more efficient on one hand, revenue management initiatives on the other. control on full-time employees and some efficiencies regarding full-time employees, controlling on SKUs and some efficiencies regarding SKUs, and some digital transformation programs, particularly in terms of the way we sell and the way we distribute. If you want us to elaborate more on this, we could do this. But those are the main elements, and we are fully focused on this. That's our first priority for tomorrow, but it's our first priority today, and it was our first priority yesterday, and we're working on this. And we expect to improve our financial results in the second half of the year. This is our number one priority.

Great. Thank you so much.

Okay, thank you very much. Our next question comes from Ms. Constanza Gonzalez from Quest Capital. Please go ahead, ma'am. Your line is open.

Good morning. Thank you for the call. I have a question regarding Argentina. Could you clarify about what are you expecting in volume and prices in the next quarter, or if you are expecting some recovery at the end of this year or the beginning of 2025?

Thanks. Thank you, Constanze. Extremely difficult to know exactly. Look, if our volumes were 100 before the beginning of the crisis, and today is 70, we expect to keep in the level of 70 during Q3, and we expect to start it in the level of 85 in Q4. But this is just an expectation because we really don't know. And if we do this, if we're able to establish an AP size, we could make a profitable end of the year. But again, this was expected. We don't know exactly. Regarding price, as I explained before, we expect to move in line with inflation.

Okay. Thank you.

Okay, thank you very much. Next question comes from Ms. Sofia Figuera-Osa from Compass Group. Please go ahead, ma'am.

Yes, can you hear me?

Yes, please go ahead.

Yes, please. Okay, thanks for the call. My question is if you have another Norway-Korean asset that can be put on sale after the land that we saw this quarter?

No, we expect not to have something like this in the second half of the year.

Okay, thank you very much.

Thank you.

Okay, thank you very much. Next question comes from Lucas from J.P. Morgan. Please go ahead, sir, your line is open.

Hello.

Hello, I hope you hear me well. My first question is, yeah, thank you. So my first question is, in light of this very uncertain scenario for commodities effects, if the company wouldn't be able to reconsider its policy not to hedge commodities effects, so how do you see the benefits of the cost of hedges versus the, you know, the ability of having a bit more, let's say, predictability on these lines. So that's the first question. The second question is just to clarify, third quarter, the company is seeing an improvement in volumes. If you can give us more information on how the premium segments performed in these bad weather situation in the second quarter, and if you see sort of a premium accelerating more now in the third quarter versus the whole industry. In other words, if on top of the price increases you're implementing, if you believe that mix should also be helpful to improve your average price. Thank you.

Thank you, Luca, for your question. Look, regarding hitting, we have a very clear policy, and we do not hit raw materials. I mean, because you have two alternatives, or you hit or you do not hit. If you do not hit, you face the, spot curve of prices. If you hit, you face the future curve of prices. And if you face the spot price, this is the price. If you want to face the future curve of price, you have to pay the cost of intermediaries. So at the end of the day, you lose money. And if you ask me, hey, but if you hedge when it's a good idea and if you do not hedge when it's a bad idea, I think if I would be able to do this indeed, we would do it, but we do not have this ability indeed. So we are very clear on this. We do not hedge and we will not hedge. Regarding premium, it's very strange what has happened because let me take the beer category in Chile, for example. Before the pandemic in 2019, Premium was 25 to 27% of our volumes. After pandemic, premium is in the level of 50%. In the best moment, it was something like 60% in 2021. When the withdrawals of money from the pension funds, people have a lot of money in their pockets and the premium jumped to 60%. Now, premium is decreasing to 50%, but still much better than it was in 2019. And we have decreased the percentage of premium in the last month from 53 to 50, 49, and we expect it to stay in that level. We assume that no major changes are going to happen in the rest of the year.

Okay, thank you very much. Very clear.

Thank you.

Okay, thank you very much. We have a question from Nicole Helm from MetLife Investment Management. Please go ahead now. Your line is open. Okay, just once again, we have a question from Nicole Helm from MetLife Investment Management. Your line is open in case you have a question. Okay, we'll come back later. Next question, this is a follow-up question from Alvaro Garcia from BTG Pac-2. Please go ahead. Your line is open.

Sorry about that. I meant to ask about COGS, and then I meant to ask about Chile volumes, but both of those questions have been answered, so thank you very much.

Thank you, Alvaro.

Thank you very much. Okay, thank you. We'll once again start, too, for any final questions. We'll wait for another moment or so for any additional questions to come through. Okay, it looks like we have no further questions at this point. I'll be passing the line back to the management team for the concluding remarks.

Thank you very much. To conclude, I would like to reiterate that our second quarter of 2024 results were very weak and were negatively impacted by a particularly difficult context for demand in China and Argentina, and the depreciation for main local currencies, which resulted in higher cost pressures. Given this scenario, we are confident that our multi-category beverage strategy based on focus and synergy should help us to return to the profitability path, which is our short-term priority going forward, as I mentioned during the conference call. Thank you very much for attending.

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