Compañía Cervecerías Unidas S.A. (NYSE:CCU) Q1 2023 Earnings Call Transcript May 16, 2023

Claudio Las Heras: Thank you for attending CCU’s First Quarter 2023 Conference Call. Today with me are Felipe Dubernet, Chief Financial Officer; and Carlos Anwandter, Financial Planning and Investor Relations Manager. You have received a copy of the Company’s consolidated first quarter 2023 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. Before we begin, as usual, please take 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. These statements should be taken in conjunction with the additional information about risks 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 Felipe Dubernet.

Felipe Dubernet: Thank you, Carlos, Claudio, and thank you all for joining us today. During the first quarter 2023 CCU posted recovery in financial results with a stable EBITDA from previous year in a tough economic environment. This better performance was mostly driven by our main operating segments in Chile. As a consequence of the implementation of our recovery profitability plan HerCCUles 2023. The upward trend in results during the last quarter showed us that we are in the right path. Nonetheless, we are aware that the results of the first quarter of this year are only the beginning, and to consolidate this trend we will continue focusing on the six pillars of HerCCUles 2023, which are, first maintain business scale, then strengthen revenue management efforts, third enhance the CCU Transformation program to deliver efficiency gains, number four, optimize CapEx and working capital, five, focus on core brands and high volume margin innovations, and six, continue investing in our brand equity.

Before describing the performance of the quarter, it is important to mention that results from first quarter 2022 were still highly influenced by a particularly positive scenario for consumption in Chile, as consolidated volumes during that quarter were up 7.1% versus first quarter 2021. After that, volumes contracted, compared with the same quarter of previous year 2.9%, 2.8% and 5.5% in the second, third and fourth quarter of 2022, respectively. Therefore, in spite of decreasing volumes in the first quarter 2023, we are still on track to maintain businesses scale in 2023 in line with our pillar number one of our regional plan, HerCCUles. During first quarter 2023, our revenues expanded 4.5% boosted by 8.1% growth in average prices in Chilean pesos, partially offset by a low single digit drop in volumes.

The lower volumes were caused by contractions in all the operating segments, mostly due to high company surveys as mentioned before, especially in Chile, a weaker consumption environment in Argentina, a lower line exports. The better average prices in Chilean pesos were mainly explained the revenue management initiatives in all our main geographies and categories despite negative mix effects in line with pillar number two of our regional plan HerCCUles. Accordingly, gross profit jumped at 9.6% and gross margin rose 227 basis points. The later also associated with lower cost pressures as a consequence of more favorable cost in some key packaging materials. MSD&A expenses as a percentage of net sales deteriorated 317 basis points, many of the consequence of the low base of marketing expenses in the last year first quarter due to face and higher distribution expenses.

This was partially compensated with efficiencies to all our operating segments, which will be more reflected during the rest of the year in line with our third pillar of HerCCUles. In all, EBITDA reached a 0.2% increase and EBITDA margin contracted 80 basis points. The slight expansion in EBITDA is surely a good start to recover our financial results, although more efforts are needed to consolidate the profitability improvement in an inflationary scenario. Regarding net income itself 9.6% associated with a lower non-operating result mostly due to higher financial costs and a higher loss in equity and in term of joint ventures associate. Additionally, in the first quarter of 2023, we delivered stronger cash generation. Net cash inflow from operating activities expanded versus last year, while net cash outflow from investing activities were stable versus last year.

This is in line with our fourth pillar of HerCCUles. Furthermore, we reduce our portfolio complexity while brand equity remains in high levels, especially in our core brands and continue to be key to gain maintain market share in our main method category. This fulfilled our pillar number five or six of HerCCUles. In the key operating segments our result both the positive turning points after four consecutive quarters of contractions in EBITDA. Top line expanded 6.4% driven by 7.6% growth leverage prices while volumes dropped 1.1% Prices were higher due to revenue management inputs in all our categories, partially offset by negative mix effects in the portfolio. Volumes were seen through the quarter, although decreased, mainly associated with a tough comparison base.

Gross profit expanded 14.9%, and gross margin improved 350 basis points, also as a result of lower cost pressures, and efficiencies in manufacturing costs. MSD&A expenses as a percentage of net sales deteriorated 357 basis points, mainly explained by a lower comparison base in marketing expenses in the last year’s first quarter due to phasing, and higher distribution expenses. Consequently, EBITDA increased 6.8% and EBITDA margin was stable. In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales recorded a 4.7% rise as a result of an increase of 13.9% in average prices in Chilean pesos, partially offset by 8.1% contraction in volumes. Industry volumes were weaker in all the geographies, but mainly in Argentina as a consequence of a difficult economic context.

The better average prices in Chilean pesos were explained by prices increasing in line with inflation in Argentina and revenue management initiatives in all the other geographies. Consequently, gross profit expanded 9.3% and gross margin grew from 52.9% to 55.3%. MSD&A expenses as a percentage of net sales deteriorated by 161 basis points due to a lower scale in Argentina. Altogether, EBITDA expanded 7.9% and EBITDA margin improved 53 basis points. The Wine operating segment faced a particularly challenging scenario during the quarter. Revenues were down 17.7%, fully explained by weaker volumes. Average prices were flat, as revenue management efforts in domestic markets were offset by negative mix effects in export volumes. The lower volume was mostly attributable to exports, which contracted in the low-20s, associated with inventories adjustment from our clients and distributors.

On the other side, domestic volumes in Chile dropped mid-single digits. As a result of all the above, gross profit deteriorated 32.5% and gross margin contracted 699 basis points. MSD&A expenses dropped 1.9%, although as a percentage of net sales deteriorated by 508 basis points, due to the lower revenues. In all, EBITDA reached CLP3,496 million, a 69.5% fall. Regarding our main JVs and associated businesses, in Colombia, we started 2023 with a low-single-digit decrease in volumes, while in Argentina, our water business with Danone showed a low-teens expansion in volumes. Both businesses are relevant for our regional multi category beverage strategy being committed to continue gaining escape to be profitability in the future. Now, I will be glad to answer any questions you may have.

Q&A Session

Operator: Thank you very much for the presentation. We will now be moving to the Q&A part of the call. [Operator Instructions] Our first question comes from [indiscernible] from JPMorgan. Please go ahead. Sir, your line is open.

Operator: Our next question comes from Mr. Henrique Brustolin from BTG. Please go ahead. Sir, your line is open.

Operator: Next question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.

Operator: Thank you very much for the question. We’re going to readout a couple of text questions at this point. The first text question is from Vidhi Vira from Goldman Sachs. Congratulations on the results. How was the demand and pricing in Chile shaping up this quarter?

Operator: The next question comes from — we saw that there was a text and an invoice question. So, we unmuted your line. Mr. Rodrigo Godoy from Creditcorp. Your line is open.

Operator: Next question we have is from Fernando Olvera from Bank of America. Please go ahead. Sir, your line is open.

Operator: Thank you very much. We see no further questions. At this point, I’ll pass the line back to the management team for any concluding remarks.

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

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