Compañía Cervecerías Unidas S.A. (CCU) Q4 2022 Earnings Call Transcript

Compañía Cervecerías Unidas S.A. (NYSE:CCU) Q4 2022 Earnings Conference Call March 1, 2023 10:00 AM ET

Company Participants

Claudio Las Heras - Head-Investor Relations

Felipe Dubernet - Chief Financial Officer

Conference Call Participants

Felipe Ucros - Scotiabank

Lucas Ferreira - JPMorgan

Sorabh Daga - HSBC

Henrique Brustolin - BTG

Operator

Ladies and gentlemen, thank you for standing by. Good day, and welcome to CCU's Fourth Q2022 Earnings Conference Call on the 1 March 2023. Today's conference call is being recorded. At this time, I would now like to turn the conference over to Claudio Heras, the Head of Investor Relations. Please go ahead, sir.

Claudio Las Heras

Welcome, everyone. Thank you for attending CCU's Fourth Q2022 Conference Call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; and Mr. Carlos Anwandter, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated fourth Q2022 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 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, Claudio, and thank you, you all for joining us today. In 2022, we faced a particularly challenging year for the profitability of the business, especially in Chile. Consolidated EBITDA dropped 19.6%, while EBITDA margin deteriorated from 17.9% to 13.2%.

Financial results were mainly affected by negative external effects coming from the depreciation of our main local currencies against the U.S. dollar and higher prices in raw materials, packaging and energy, impacting our costs. The latter was partially offset with prices and efficiencies.

Net income contracted 14.7%. In spite of the deterioration of our results, I would like to comment on the actions that we took in 2022, which put us in a position to look for profitability improvement in 2023. First, we were able to preserve business scale as volumes decreased 1.1% despite a high comparison base from last year and a weaker consumption environment. Second, we overall kept market share in our core categories.

Third, we strengthened our portfolio of brands by reaching historically -- historical brand equity level in our main category in the region. And fourth, we implemented revenue management initiatives in all our geographies to mitigate cost pressure with prices in line with inflation in our main categories by the end of the year, especially in Chile.

All of this will be enhanced this year by the implementation of HerCCUles 2023 a recovery profitability plan, which encompasses 6 pillars. Maintain our business scale. Second, strengthening revenue management efforts; enhance the CCU Transformation program to deliver efficiency gains in costs and expenses. Focalize and optimize CapEx together with optimizing working capital. Focus on core brands and high-volume margin innovation. And continue investing in our brand equity.

I would like to mention that by the end of the year, we started to see some positive trends from this, especially in Chile, reflected on prices, which expanded in line with inflation and efficiencies in costs and expenses. From a quarterly perspective, in Q4, 2022, we continue operating in a tough economic environment, which impacted consumption. Top-line decreased 6.6%, driven by 5.5% drop in volumes, however, 10% growth versus Q4, 2019, and a 1.1% decrease in average prices in Chilean pesos.

EBITDA contracted 21% and EBITDA margin decreased from 18.9% to 16%. The latter mainly associated with the same negative external effect that impacted us during the year. Net income fell 36.4% caused by a lower operational result as explained, and a greater loss in non-operating results, mainly driven by higher financial expenses due to a larger debt.

In terms of our segment, in the Chile operating segment, top line grew 3.6% in Q4, 2022, due to a 12.4% growth in average prices, partially compensated by 7.8% lower volumes. However, with growth against Q4, 2019, we grew 12.7%, mostly due, of course, we had a very high comparison base in 2021. EBITDA decreased 24.4% and EBITDA margin decreased from 19.4 to 14.2.

In International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales dropped 27.6%, mainly as a result of a contraction of 26.7% average prices in CLP, although the increase in local currency in line with inflation, while volumes contracted 1.1%, the growth against Q4, 2019 was 4.7%.

EBITDA went down 19.7%, negatively impacted by the exchange rate translation effect in Argentina related with hyperinflation accounting. In the Wine Operating segment, revenues were up 3.2%, mainly explained by a 5.7% growth in average prices partially offset by a 2.4% contraction in volumes, 8.4% growth versus Q4, '19. As a consequence, EBITDA improved 18.5%.

Regarding our main joint ventures and associated business, in Colombia, where we produce and distribute beer and not with Postobón, top line growth, almost 20% in Chino driven by volumes and average prices. Thus, we continue expanding business scale during the year.

In Argentina, our recently acquired water business, where we have a joint venture with Danone showed strong top line growth led by volumes and higher prices, allowing a recovery in financial results. Both JVs represented CLP 7.4 million as of December 2020.

Now I will be glad to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead. Your line is open.

Felipe Ucros

Let me start with the normalization of trends. Last few quarters have seen a bit of a reversal of the incredible premiumization that you guys saw over the previous two years. I think locations and channels have also been normalizing. So that's been a little bit of a headwind. Just wondering if you could give us an idea of how far you think you are from reaching a stable level on those metrics?

Felipe Dubernet

Thank you for your question. What I can say is that we have experienced throughout the year in 2022, especially from Q2, Q3 and now Q4;. If you compare Q4, against the two previous quarters, we saw a sequential improvement in our results. So -- because, for example, in Q2, Q3, our margin contraction was, for example, a consolidated level 700 basis points, and especially in Chile was 1,000 basis points per contraction in margin in Q2 and Q3. So this was the bottom in terms of bad results.

What I can say is that in Q4, the deterioration of the margin was half of what we experienced in Q2, Q3, and especially in Chile. So Chile has improved -- is in the right trend to improve the margin. So as we said on previous calls, it takes time to recover the profitability. But all the actions are in claims. So first, prices, as you saw, especially in Chile, we were able to catch-up inflation or mostly catch-up inflation towards the end of the year, so that's good news.

And on the other hand, we are a more favorable exchange rate in Chile so that certainly should impact our cost base. But nevertheless, I think the big risk is about the industry volumes. Why we are preserving or even growing market share the last finals -- the last measure on market share at the end of the year and beginning of the year are very good for CCU, especially in Chile, in all the categories, be nonalcoholic and wine.

However, we are seeing an industry deterioration. So at the end, we will see along the time a sequential improvement as we experienced in Q4, compared to Q3 in terms of our results. By saying that, all -- although this world is very volatile. Today, we have experienced, I don't know, CLP 100 less exchange rates than Q3, for example. However, the scenario is volatile. By saying that, I could say, but all these structural actions are taken.

Felipe Ucros

Understood. Any details you can give us on premiumization and channels? How close are they to a normalized level?

Felipe Dubernet

All of these, of course, we reach not only a very high comparison volume as we discussed several times in 2021, especially because of the exceptional consumption growth that we experienced last year, but also a high premiunization in many categories, especially in alcoholic products. So today, we are experiencing a decrease in terms of premium mix, going the consumer more to the mainstream brands.

However, I would like that is still much higher the premium mix than in 2019. So there is some sort of normalization or standardization of that, we have experienced. So this, of course, is also jeopardized a little bit the price efforts. However, we are confident that it would stabilize along the year at higher level than the one we had In terms of channel, I think you asked about channel. Still, the on-premise channel in Chile is less of what it was in 2019. So it has not fully recall. But I would say it has recovered, but not at the level of 2019. Okay?

Operator

Our next question comes from Mr. Lucas from JPMorgan. Please go ahead. Your line is open.

Lucas Ferreira

I was just wondering if -- regarding prices, if you can get into more details, if there are new initiatives in places in the different markets. So is there something ongoing or any new price hike that you plan to implement in the next few months. If that's still part of this normalization we're going to see? And the second question is about the cost. So you mentioned that the effects being helpful there to offset part of the cost impacts.

But if you can comment on the raw materials, how you're seeing them? The numbers that we see in the fourth quarter, how much of the decline, for instance, in the aluminum prices we saw through the beginning of the second half of last year? How much of that is already in your COGS lines? Or if there's something else to come in the first quarter or the second quarter?

Felipe Dubernet

Lucas, thank you for your question, regarding pricing, has been done, as we announced in previous calls in Q4,. as you saw, especially in Chile, where we were behind the prices; Because in the other big markets such as Argentina, we were all the time in line with inflation. But in Chile, we really catch up on the -- on the last quarter of the year. As you saw, the Chile Operating segment price per increased 12.4%, so practically in line with inflation.

As a strategy and one of the pillars of our HerCCUles plan is to continue with our revenue management efforts. And this is not only price list, but also rationalized promotions. So -- and also working a lot on pack mix, price architecture in order to optimize our revenue periscope meter. So we'll continue this effort certainly. And regarding cost, it was very helpful the FX tailwinds that we have experienced. Because as I will recall you, 70% of the cost of goods sold are new debt to the U.S. dollar. So now if you compare Q4, was CLP 915 per U.S. dollar.

And nowadays, today, spot prices are close to between CLP 800 to CLP 830 has been in the last two weeks. So this is very good in terms of, let's say, easing the cost pressure. In terms of raw material commodity costs, aluminum prices are stabilized somewhat in $2,400 per or -- USD 2,300 per ton aluminum. When you compare with the average of 2022, this is $400 less. So practically, between 10% to 15% of less -- the combination of less aluminum price, a lower exchange rate would certainly help our costs and especially in packaging material, this is more automatic, because we don't carry out too much inventory there.

Regarding grains, also the prices are decreasing in international markets. We and as a consequence, barley prices, we are finishing up the harvest this day in Chile and Argentina. However, we are carrying a little bit more inventory than usually. And this was a risk measure we took after the Ukraine war where we increase our supply, and we will be carrying out a little bit carry-on inventory that would be diluted or depleted along the year, also in PET, in resins.

So there are also a new electric contract in place that certainly would help to reduce our energy cost. So all in, we saw a more favorable cost equation, let's say. And along with the price increases, we already did, that would be But by saying that, our cost base per hectoliter is much higher than in 2019.

So, although the U.S. dollar is lower than 2022 average is much higher than 2019. Commodity costs are also much than 2019. So all the price actions that we took would be very welcome in order to compensate the trend on commodity prices and exchange rates we have experienced in the last years. So as I said, sequentially, as you are seeing in Q4,, we are in the improvement path.

Operator

Our next question comes from Mr. Sorabh Daga from HSBC. Please go ahead. Your line is open.

Sorabh Daga

Thanks for giving me this space here. I have two questions, please, if I may. First, I mean, any comment on the premium side of the beer portfolio in Chile? And how have you viewing the segment prospect portfolio, especially when you look at brand Heineken and compared with some of the competitive brands like brand Corona? And then maybe a bit on revenue management side, right? Can you comment on how you're managing the trade discounts and share some insights if the trade discount management has gotten better over the last few years? Or are you seeing the prospects to be on these lines?

Felipe Dubernet

So Sorabh, thank you for your question. Regarding the beer portfolio, in -- especially in the big markets such as Argentina and Chile, we manage the full range of price points and positioning regarding different brands. So we are the leaders in draft in Chile, a very successful brand with and Also we are the leaders, if you are up in international brands with Heineken and So -- and I would like to say the evolution of in Chile have been outstanding, gaining share, gaining volume, very good performance.

And so and also Heineken is doing -- it works, but at a lower rate of growth. On the other hand, we had a very good position in Royal which is a local entry premium brand, which also has had a tremendous growth all over the last 10 years, I would say, with very good brand equity. And also the mainstream brands are preserving at least or even increasing in the last time the brand equity.

So, we are very happy with the portfolio in beer and we are reaching in the -- of the last 10 years, the highest brand equity that we measure through the preference of the consumer. And this is very important because this led us to your second question at the end, because when you have very strong brand equity, even if you do less promotions than competition, and you enhance your price efforts, you have more pricing power with a healthy portfolio in terms of the brand entity. And this is key.

Despite what we do in terms of measuring promotion effectiveness of revenue management efforts, the key, and this is very important in our beer portfolio, is that we are entering the year with a very good brand equity level, which ensure us that we could maintain our price points and propositions and also, as a consequence, rationalize promotions and discounts.

Sorabh Daga

That answers, I mean on the revenue management side, just to follow up on the trade discounts. How about the premium -- how about the mainstream and the soft drinks, too, if you can help us with.

Felipe Dubernet

Look, we have clear strategies for premium, mainstream, each brand has its role in a complex market as the Chilean one. So also, we do in each of the brands, a package strategy, with different price points and position. And overall, your question in soft drink is the same.

Also, the brand equity in soft drinks is very healthy, especially with good evolution of Pepsi -- so also, our brand equity in soft drinks help us also to design this price architecture and in order to have a healthy portfolio. And I'm talking at healthy portfolio is a portfolio where you need less promotions in order to be acquired to be bought by the consumer at the end. And this is a good advantage. So it's the base of everything, the healthy of the brand, and we are brand-builders, not discounters.

Operator

Our next question comes from Mr. Henrique Brustolin from BTG Pactual.

Henrique Brustolin

Two questions on my side, both of them in Chile. The first one, I would like to hear a little bit more on what are your expectations for the size of the market of alcoholic beverages and nonalcoholic beverages into 2023 given the comparison basis and total volumes, which when we compare to pre-pandemic they remain quite strong.

And also on volumes, if you could just comment on how this brand equity, which is the highest level on record that you mentioned, how does that compare to the market share -- volume share that you have today in Chile? And the second one is regarding margins. If you could just comment on how the profitability in Chile evolved throughout Q4. The idea here is to sort of gorge on what is your run rate going into Q1, especially following the price hikes that you did? So those are the two points I would like to address.

Felipe Dubernet

Thank you, Henrique. A lot of questions, but I will try to do my best. As I mentioned, we are experiencing the deceleration of the industries compared to 2022, and of course, to 2021, no doubt of that. We are still -- it's difficult to see how much would be this deceleration of the industry because while maintaining market share during Q4, we experienced a decrease, not only in alcoholic products, but also in nonalcoholic. But in alcoholic was a little bit more the decrease in terms of the industry, I would say, was high single digit or practical double digit in alcoholic products.

However, in nonalcoholic was mid-single digit decrease. However, still, we are talking about high single-digit growth against 2019. So how much will decrease in the upcoming quarters, this is the big question, I would say. But we are experiencing this deceleration for sure because we reached very high volumes in '21 and in a big portion of 2022.

Regarding market share, this is the good news. We are with high level of not only brand equity, as I mentioned, but also growing market share, especially in Chile in both alcoholic and nonalcoholic products, which is good because at the end, we have been doing big efforts in revenue management. So increasing market share while doing efforts in revenue management is a good news. So that's it.

Regarding margin, as I mentioned, and I will try to explain again, Q2, Q3 were the bottom of the gain taking Chile the margin reduction in both quarters was up to 1,000 basis points in EBITDA margin. In Q4,, you saw 500 was the reduction 500 basis points, more or less, the reduction on EBITDA margin, and with sequential improvement throughout the month of the quarter, October, November and December because we took in every month price actions.

And also, we had improvement of costs, especially due to the exchange rate. So we are more positive on that this trend of sequential improvement should continue in the upcoming quarters. So the big risk at the end is the volume risk. That's the big risk because of this deceleration of the industry, especially in alcoholic, as you pointed out.

Operator

We are going to be going through the text questions now. We have a couple of tax questions. The first one comes from Maria get from BDT Security. What is your vision of the HC rebond covenant if the covenant change is not achieved?

Felipe Dubernet

Hey Michael, could you repeat the question, please? There was a low volume for one second. Thank you.

Operator

Sure. Question is what is your vision of the HC Rebond covenant if the covenant change is not achieved?

Felipe Dubernet

All right. Yes. We expect to achieve the change of the government in order to align with all the other bonds, local bonds that we have. And if it is not achieved, we will take surely actions on this bond, but nothing to announce. We prefer to -- and we expect to achieve the change of the government for the time being.

Operator

Our next question comes from Mr. Fernando Olvera from Bank of America.

Fernando Olvera

Very quickly, my first question is for Colombia. If you can give us a breakdown of how much of top line growth came from pricing and how much from volume? And also, how do you expect this top line to behave in 2023, would be great. And also, can you share what will be your CapEx this year and the main projects in which you are going to invest?

Felipe Dubernet

Yes. Colombia. Yes, Colombia was a [indiscernible] year, we started very well in the first quarter. And then we have experienced some industry deceleration. I would say that mostly of the top line came from price as our volumes were a little bit lower than expected; However, still building a scale there.

Going forward, we are looking at repositioning of some brands, such as, for example, with a new value proposition in the market, and also continue to improve or increase the brand equity of while sustaining the performance of Heineken. So that's Q4. Regarding your question on CapEx, our CapEx of 2022 was CLP 190 billion. We expect the CapEx level to be reduced going forward this year.

And one of the main projects is the construction, the building and construction of resin recycling, model recycling plant to be built in This is up to $40 million. This is the main CapEx project in order to fulfill the sustainability and also the single-use plastic by 2025. So this is a key project and one of our main projects for the year, the construction of the resin recycling plant in Chile with an investment up to $40 million.

Operator

[Operator Instructions] We have one more text question here from Mr. Sergio Winter from Falcom Asset Management.

Do you know if the competition in Chile has followed the price increases you did in the fourth quarter. Those price increases used in Chile were at the beginning, mid or end of the quarter?

Felipe Dubernet

I think the question -- I would answer the question in that in a different way, let's say, we have increased prices in all our [indiscernible] and at the same time, we have increased market share from November. So let's say, we are in a positive trend of market share. So it seems that all the industry increased prices in the last month.

Operator

We'll give another few seconds for any additional questions to come in. Okay. It looks like we have no further questions at this point. I'll pass the line back to the CCU team for the concluding remarks.

Felipe Dubernet

Thank you, you all for attending this conference call. In the last quarter of 2022, we still suffered from the impact on our cost and expenses from negative external effects and also high companies on base in terms of volumes and financial results. However, as I said, against previous quarters, we are experiencing a sequential improvement.

We are entering 2023 in a good shape in terms of prices, business scale and brand equity. This, together with the HerCCUles 2023 plan will be the key driver to recover profitability. Finally, I would like to take the opportunity to thank all CCU employees as for the effort and dedication in a particularly challenging year. I am confident that we will continue putting all our efforts to recover the path of profitable and sustainable growth. Have a wonderful day.

Operator

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