Compañía Cervecerías Unidas S.A. (NYSE:CCU) Q3 2022 Earnings Conference Call November 9, 2022 10:00 AM ET
Company Participants
Claudio Las Heras – Head-Investor Relations
Felipe Dubernet – Chief Financial Officer
Conference Call Participants
Henrique Brustolin – BTG
Carlos Laboy – HSBC
Thiago Bortoluci – Goldman Sachs
Felipe Ucros – Scotiabank
Operator
Good day, and welcome to the CCU’s 3Q 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, Head of Investor Relations. Please go ahead, sir.
Claudio Las Heras
Welcome, everyone, and thank you for attending CCU’s third quarter 2022 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 third quarter 2022 results. Felipe will now review our overall performance and then we will move on to our Q&A session.
Before we begin, 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 actual 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 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 Mr. Felipe Dubernet.
Felipe Dubernet
Thank you, Claudio, and thank you all for joining us today. In the third quarter of 2022, we continue to face an adverse macroeconomic scenario, which negatively impacted our financial results, particularly in Chile where we also have a challenging comparison base against 2021. In terms of financial results, EBITDA contracted 33.4%, the later fully explained by the contraction in the Chile operating segment, while the international business and wine operating segments improved the financial results. EBITDA margin decreased from 16.3% to 9.9%, indicating that our revenue management efforts and efficiencies have not been enough to offset three main external effects. First, the depreciation of our main local currency against the U.S. dollar, impacting our U.S. dollar denominated costs. Second, higher raw and packaging material costs; and third, other costs expenses and pressures associated with an accelerating inflation in our main geographies.
In line with this, net income totalized a gain of CLP17,226 million a 59.1% drop caused by a lower operational results and a greater loss in non-operating results driven by higher net financial expenses. In this difficult business environment, we would like to mention that our long-term business momentum remains strong, based on, first, a solid business scale as we decreased slightly our volumes by 2.8% in the third quarter. However, we grew 16.4% versus 2019. Second, a stable growing market share in our main categories; and third, a robust brand portfolio sustained on a constant improvement in our brand equity.
We are focused as a company on recovering our financial results. To achieve this, we launched across all our business units, a plan called HerCCUles 2023, aiming to recover profitability, especially in Chile, encompassing 6 pillars: first, to maintain our business scale; second, revenue management efforts; enhance the CCU Transformation program to deliver efficiency gains in cost and expenses; four, focalize and reduce CapEx together with optimizing working capital; fifth, focus on core brands and high volume/margin innovations; and six, continue to invest in our brand equity as it is crucial for our long-term sustainability of the business.
As mentioned above, the Chile operating segment has been the most affected by the adverse macroeconomic scenario and a weaker consumption environment. Our top line was flat due to 4.8% growth in average prices, explained by revenue management initiatives, partially offset by the negative mix effect in the portfolio, while volumes declined 4.5%. Gross profit contracted 16.8%, mostly caused by a 20% devaluation of the Chilean peso against the U.S. dollar, affecting our U.S. dollar-denominated cost, and cost pressure from higher prices in raw and packaging materials. MSD&A expenses grew 8.3%, and as a percentage of net sales increased 261 basis points due to expenses pressure coming from higher inflation and oil prices.
In all, EBITDA decreased 51.1%. In International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales recorded a 25.8% rise, as a result of an increase in average prices in Chilean pesos, while volumes contracted 1.3%. The better average prices were mostly explained by revenue management initiatives in all the geographies. Gross profit expanded 28.9%, and MSD&A expenses as a percentage of net sales were flat due to efficiencies that compensated high inflation and other cost pressures. Altogether, EBITDA increased 16.9%.
In the Wine Operating segment, revenues were up 19.8%, mainly explained by a 19.1% growth in average prices as volumes increased 0.6%, the later driven by exports and the Argentina domestic market. The higher prices in Chilean pesos were mainly explained by a positive impact on export revenues from the depreciation of the Chilean peso versus the U.S. dollar and revenue management initiatives in our domestic markets, which permitted us to partially compensate higher cost in packaging materials and inflationary pressures. Consequently, gross profit expanded 17.3% and MSD&A expenses grew 24.1% and as a percentage of net sales increased 85 basis points. In all, EBITDA expanded 9.9%.
In Colombia, our joint venture to produce and distribute beer and malt Postobón top line rose over 30% in Chilean pesos, driven by both volume and average prices growing double digit, the latest due to the implementation of revenue management initiatives. Financial results were similar from last year due to strong cost pressures and the devaluation of the Colombian peso against the U.S. dollar. In Argentina, our water business with Danone showed strong top line growth led by volume and prices, along a recovery in its financial results.
Now I will be glad to answer any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll take our first question from Henrique Brustolin from BTG. Please go ahead.
Henrique Brustolin
Hello Felipe, hello Carlos. Two questions from my side, both of them in Chile. The first one, if you could comment a little bit on how margins evolved throughout the quarter because we see some of these cost pressures declining? So just to get the run rate that you were at the end of the Q. And how you think about margins going into Q4 and 2023?
And the second one and a little bit related to that, if you could comment a little bit on your price hikes on the quarter and on the year so far, how much more do you expect to hike prices to offset cost pressures or if the levels that you have right now already good enough to cope with that?
And in terms of the mix that you mentioned had a negative impact on prices. If you could give a little bit some more color on what was this mix impact in terms of alcoholic and nonalcoholic performance and also if there was some consumer trade down in those categories. So these are the two questions on my side.
Felipe Dubernet
Okay. Good morning or good afternoon, I don’t know where you are, Henrique, thank you for your questions. Regarding your first question, yes, absolutely, we are not happy with the margins that we had in quarter three. So because at the end, we have two things that are impacting heavily the margin. So on the one hand is the right and go and packaging material costs, especially related to the U.S. dollar because on quarter-on-quarter, the devaluation of the Chilean peso against the U.S. dollar was 20%. So we suffered for especially high exchange rate in quarter three impacting our monopoly [ph].
You are right in saying that some cost pressures are easing, especially because of some drop of commodity price, especially maybe we will be profiting more presenting aluminum. Aluminum prices, of course, we are seeing this, but this has been somewhat compensated by this devaluation trend that we had during the quarter. But that’s right. We could see in the cost side a better picture in the coming future.
Still exchange rate remains something very volatile. We practically reach beginning of October CLP1,000 per U.S. dollar. Today may be higher. But is very volatile, as you will understand. But we will profit certainly from commodities. Although we have a little bit high level of some raw materials that we take some risk to avoid risk of supply, especially in malt and resin, but there will be certainly during the upcoming summer.
But the key question, the second aspect that is important is the price hike. You are right, especially in all categories, we have been raising prices, some of them are a little bit more ahead. For example, nonalcoholic or liquors others a little bit behind inflation and certainly also affected by mix as beer. So in these aspects, what I can say is that in terms of beer, after September, after the – we published the results of September because it’s public, we did the price increase in both traditional trade and supermarkets from October, 1 of October and a new price increase now in November. So we increased in the range of 5% to 7% of the prices in October. And again, an additional 5% in November in the year.
And the same case in October in nonalcoholic, we increase in the rate of 5% across all the channels in nonalcoholic. So we had a certain number of price increases and somewhat were jeopardized as I have stated, by mix effect, but we will continue with price increases now in October and now early November. So this certainly we expect to project a better margin perspective for the upcoming quarters, but I cannot be specific on how much because it would depend also on volumes in inventory depletion of raw materials. So they are many variables, but it is difficult and we never do a forecast. But certainly, the intention is to recover the results and we are completely in line with this.
Regarding the mix between alcoholic and nonalcoholic that you asked for, as you know, the comparison against 2021 is very difficult because it was a very unusual year with the liquidity of the consumer, given the pension fund withdrawal and the government aid. So it was injected a lot of money to the consumption. But what I can say that if we compare the volumes against 2019 that is a better reference for the quarter, both alcoholic and nonalcoholic are in the same line, about 20% growth in terms of volume. So that is the CAGR for three years of about 6%. So there is no big difference.
However, what I would like to mention is that, especially in alcoholic categories, of course, we reach a very high proportion of premium products beginning of this year, again, to mention that for more liquidity of the consumer, consumer more expensive products at the beginning of the year, and this has been stabilized or has been decreasing in the last two quarters. However, at a higher level than the one we have in 2019.
I hope I answered your questions, Henrique.
Operator
We’ll take our next question from Carlos Laboy from HSBC. Your line is open. Please go ahead.
Carlos Laboy
Yes, thank you very much. As a category leader, can you share with us some insights on the timing of waiting until October and November for these price increases? I’m sure you probably wanted to take them earlier on beer. And as a category follower in soft drinks, again, it looks like you’re playing catch-up to much earlier price increases by the Coke system, why wait on that one as well?
Felipe Dubernet
It is public that competitors suffer from the same cost pressure than us, and this has been published two weeks ago in the results, and this is public. Of course, the price increases we do by ourselves, of course, and we do it independently, our revenue management efforts.
So far until October, what I can say is that we – along with the price increases, we have maintained our market shares, so that indicate that the whole industry increased prices because we suffer from the same cost pressure. There is difference between channels SKUs but this is more related to a price structure or revenue management. Also, there are some inertia or some carryover of some promotions that could affect the market prices.
But at the end of the day, the inflationary pressures, the devaluation pressures are there. There are some commodities that we would sell a lot, such as aluminum but there are others that will not sell such as, for example, [indiscernible] or grains. But although they are at a lower level right after the Ukrainian war, they are a much higher level than we had a year ago. Okay Carlos?
Carlos Laboy
Thank you very much. Do you expect volume declines in beer and soft drinks on the back of these price increases?
Felipe Dubernet
Look, this is a very important question. This is because all economists are saying that especially in Chile, we don’t know – we can talk of Argentina separately because it’s a different, let’s say, a different analysis. But in terms of Chile, for many, many years, it’s the first time we are suffering for both phenomena. One, high inflation. Chile used to have something like 3% – between 3% to 3.5% inflation and recession, economic recession. So this is what is forecasted for 2023. So we cannot predict how the consumer would evolve and how much would be the elasticity, but also in combination with a recession.
As I mentioned in the previous question, our TDR or our average growth in the last three years has been 6% in Chile, which is very good, Carlos. We will move to – I would expect to move to a lower rate, let’s say, in 2023, let’s say, low single digit. But we have not faced in – at least in the last 25 years or 30 years, 25 years – 20 years, 25 years at the same time, a recession in an inflationary context for the country. So how much would be the volume or the volume drop that we could face given the price increases that we are executing, we are still – it’s too early to call, I would say, at least.
But certainly, I think a good perspective would be to maintain if you – in 2023, a lower rate than the one we had in 2022, as I mentioned, three-year growth, 6% is very good. It should be more to – more close to low single digit. But we don’t know, we haven’t faced this scenario before in Chile. What we are sure and committed is to recover the margin through revenue management efforts and also efficiencies, but we can talk later on. But first, we need to fix the direct margin, okay – or the gross margin. Okay Carlos?
Carlos Laboy
That’s really helpful. Thank you.
Operator
[Operator Instructions] We’ll take our next question from Thiago Bortoluci from Goldman Sachs. Your line is open. Please go ahead.
Thiago Bortoluci
Yes, hey guys. Good afternoon, everyone. Thanks for opening up questions. For sure, part of the story on margins, recomposition is about a better momentum in Chile and also pricing. But I guess, SG&A and efficiency will also play an important role going forward, right? So you mentioned the new step of your efficiency plan for next year, and highlighted a number of pillars in order to extract better efficiency. I would just like to understand where you see low-hanging fruits eventually to capture going forward? And how these efforts eventually to balance a little bit more SG&A will cope with the necessity to keep up investing in brand equity? And what is the opportunity to capture from better efficiency going forward? Thank you very much.
Felipe Dubernet
Thiago, nice to see you. [ph] So of course, this is the third pillar is our transformation plan where we focus – what we are focusing in other costs of sales and expenses. So in fact, we – as we have been carrying out since 2015, the former program that we called ExCCelencia CCU, and then we move to the Transformation Plan this year, but now we launched a more comprehensive plan that we call plan “HerCCUles, okay? And one of the key aspects is efficiencies. Of course, we are working in many fronts on that, from procurement, manufacturing expenses, distribution expenses and G&A or general and administrative expenses. So – and in order to come back to the levels we have previously in terms of expenses as a percentage of net sales.
In fact, the ExCCelencia CCU plan since 2015 has been – last year was very successfully reducing 1, 000 basis points as a percentage of net sales of our expenses. However, this year, given the inflationary pressures and that we have not been able yet to pass all the price increases, especially until quarter three, our indicator of expense as percentage of net sales is much higher than last year.
As you mentioned, we need to focus on real efficiencies and not jeopardize or not decreasing our support to the brands because these are key for the sustainability of the business. So we will do efficiencies not by cutting marketing, we will preserve our marketing rates, focusing on maintaining or gaining first preference of our brands.
I can enter in more details if you want, in terms of – we have many initiatives, but we are especially – we announced the new electricity contract with a much convenient, let’s say, energy – electricity, energy cost for the next year also – and this also encompasses using 100% renewable electricity power.
So it’s a win-win between an economic aspect, but also an environmental aspect.
Thiago Bortoluci
Now, this is clear, if I may just follow up on this. And this is just to understand the ambitions that you guys have for next year, right? Would it be fair to assume that we should be targeting G&A still growing in nominal terms, but eventually less than net revenue? Or this could even be more aggressive in terms of implying a nominal decrease in your total SG&A in Chilean peso terms?
Felipe Dubernet
We don’t do forecast at that level, but we expect – so this – as of today, so for example, if you saw in the third quarter, our MSD&A but along with – but our manufacturing expense has been increasing a lot, especially due to energy cost, gas and electricity this year. So we are a little bit far away from inflation when you look both expenses. We are practically in line with inflation. For next year inflation which should ease a little bit in comparison for price will be beneficial. So at the end below – current trend would be in line with inflation. We are forecasting inflation for next year from January to December, 5.3%. But essentially, we want to beat inflation somewhat through the efficiency program in order to have this. But for us, the main relevant indicator is efficiencies – excuse me, expenses as percentage of net sales.
Thiago Bortoluci
Understood. Thank you very much.
Operator
We will take our next question from Felipe Ucros from Scotiabank. Your line is open. Please go ahead.
Felipe Ucros
Thank you guys for taking this face for questions. Maybe just one on my end, a couple of the other ones I had have been asked, but maybe if you could give us a little detail on Colombia, which seemed to have a good performance, both on volume and on pricing. On the volume specifically, are you getting this by expanding your territory? Or are you still focused on the same area and you’re actually capturing shift? Or maybe it’s a mix of both just obviously if you can give us some color on that performance? Thank you.
Felipe Dubernet
Thank you, Felipe. First of all, in Colombia, I think along the quarters, we have a tough quarter two, but a better quarter three, I would say. But what I’m really delighted was about our brand preference or brand equity in Colombia that continued to increase. Because this gives us the fundamental of the business, especially the development of the Unidas brand, as you know, is our main theme brand because without having the branding in the heart of the consumer, it’s difficult to achieve market share of results because we have the excellent distribution network of Postobón. We have a good execution of the team, but with the brand preference, especially in these times. So we reached a new record in brand preference but that is much higher than our market share, which is very good because at the end, our brands have more potential in order to capture more market share. This is in the commercial front. So I would say we need – we are happy with that.
On the other hand, we have margin pressure in Colombia. Today, the exchange rate is 5,000. So the devaluation in Colombia in quarter three was high. So the devaluation of the [indiscernible] was 14%. But in quarter three was 4,372, but now it is 5,000 and we are worried about that. So new revenue management efforts should be done certainly in Colombia to compensate the profitability. So that is very important. Regarding the territories, so yes, we have a special priority where especially returnables in Promarca [ph] where our plant is. But given the distribution network of Postobón, we are present in all the territory, in all the Colombian territory with a different proposition in the portfolio. So that is the color I can give you about Colombia, Felipe.
Felipe Ucros
That’s good color. Thanks. And maybe if I can do a follow-up; I wanted to ask you about hedging, right? You guys are notably less intensive hedgers or non-hedgers at all when you compare to your other competitors, right? And [indiscernible] little bit, it’s not – it doesn’t hedge a lot, but it does a little, but then you also have AmBev, which is much more active in hedging. Does that create a problem with the timing of price increases?
Felipe Dubernet
So competitors also have increased prices, although they hedge. So it’s a temporary effect because if I would say in September or beginning of October, I would see a very high U.S. dollar and now the dollar is [indiscernible]. So at the end, the policy of the company remain the same. We only hedge or protect our balance sheet. We do not catch our flows. And the policy remains the same.
Felipe Ucros
Okay. Understood. Thank you.
Operator
There are no further questions on the line. I will hand over the call back to Felipe. Please go ahead.
Felipe Dubernet
Thank you, you all for attending this conference call. The current adverse economic scenario, as I highlighted, where we combine at the same time, inflation and recession, especially in our main operating segments, continue to negatively affect our results and profitability in quarter three, 2022, especially in our largest operating segment, Chile, as I mentioned. Nonetheless, we remain optimistic for the future as the key long-term fundamentals of the business scale, market share and brand equity remains strong. We are focused as a company on recovering our financial results by executing HerCCUles 2023, our six-pillar strategic plan, making profitability recovery, our priority.
Thank you all and have a wonderful afternoon and evening.
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