Compañía Cervecerías Unidas SA Q2 FY2024 earnings call

1. CCU's second quarter 2024 financial results were weak, heavily impacted by difficult demand in Chile and Argentina and depreciation of local currencies. 2. In Chile, the beer business was affected by unfavorable weather, but July showed better volume signs. 3. The international business in Argentina faced a sharp economic contraction. 4. The wine segment was in recovery with export growth. 5. Revenue management and cost control actions were in place to return to profitability.

In the Chile Operating segment, revenue contracted 5.5% due to an 8.4% volume drop, partially offset by a 3.1% growth in average prices. Volume contraction was caused by weaker demand from unfavorable weather. The International Business Operating segment (including Argentina) had net sales drop 22.1% as a result of a 27.2% reduction in volumes, partially offset by a 7% rise in average prices. The Wine Operating segment saw revenues expand 12% driven by 11.9% higher average prices, with export volumes up 9.1% and the domestic market down 5.4%.

1. Expect to return to the profitability path with normalized volumes growth. 2. Hopeful for volume improvement in Chile from July's positive sign. 3. Argentina business expects to see improvement in Q4 2024.

1. Adverse weather conditions in Chile negatively impacting volumes. 2. Sharp contraction in Argentina's economy and beer industry. 3. Substantial depreciation of the Chilean peso and Argentine peso against the USD, increasing dollar-denominated costs.

Q: Good morning Patricio, and thanks to this case. A few questions on my side. Maybe start with the first one on weather. You discussed 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-alcoholic 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?

A: Look, if we double click the volumes in the domestic industry -- this, we find differences among the different categories. In fact, while we are keeping market sharing general in terms in the different categories. So the figures of CCU represents figures of the industry. In the case of beer, -- so the whole Chilean segment decreased by 8.4% is volumes, as I mentioned before. But there are difference in the case of beer, the decrease was in the mid-teens, while in the case of non-alcoholic, the decrease was middle or mid-single-digit. So something like 5% in the case of non-alcoholic, something like 14% in the case of --. So as you could see, very strong difference in both cases, we are keeping marketers. You are right, when the weather is not good wine and spirits benefit from this. In fact, the volumes of spirit decreased 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 growing by far the worst in the last 20 years. Making a strong effect particle in beer, which is very sensible on temperature, on 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 assume some growth, not too much, a single-digit, 2% something 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.

Q: 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 a CCU. You announced in your release that you increased prices in July. Have you seen your competition follow you this time around?

A: Look, Felipe, I think that there is a lot of rationality in our markets 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 beer, 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 a direct cost. We need to continue making efforts on to improve prices, to recuperate margins. And we are moving in that direction, and the industry as a whole is moving in this direction.

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

A: Say the, 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 until it's all over the world. But they 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.

Q: Yes. 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.

A: Look, we are extremely happy. We made all the integration of the distributions in August, September, October, 2023. It 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. Buying incorporating the non-water products 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 a 100% paid in our P&L of 2023, and the results are extremely good and satisfactory. We're very happy on our ability to run a joint distribution, putting together today beer, wine, cider, and water. And we're extremely happy on this. Particularly in the case of water, we are running at a positive EBITDA 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, in this month or next month. We're not consolidating this, but while we consolidate, we expect to have possibility EBITDA and positive net profits, mainly because we transform all the fixed costs of the water operation into viable costs by incorporating it in our platform. How is the year 2024 in terms of volumes for the categories? In Argentina is extremely poor. I mean, the beer category is decreasing volumes by 30%. The water business or the water category same thing. We are keeping roughly speaking our market shares there. But when volume 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.

Q: My question is related to cost. If you can share, what is your outlook for the remaining of the year? No, given that packaging and sugar costs are down, although the Chilean peso has depreciated no versus the U.S. dollar. And I have another question, but I'll wait.

A: We'll ask also Felipe to discuss from cost of raw materials and what we expect for the next -- for the rest of your year.

Q: In terms of raw material, some water, you are right. The sugar has been softened a little bit, but it still is higher than last year. So we continue to be higher and we saw at a better outlook in the future in the last time. The other downside that we have in raw materials, higher cost is pop, orange juices are at the record highest cost, especially due to Brazil. For the rest is the same trend that we have, I think they would be stable. So what is more unstable? And it's 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 markets. So it is difficult to predict. So I prefer not to give an outlook. We used in our projections 940, but at the end, if you go into Bloomberg, you'll find a full array of projection. Also remind that it is very sensible to copper prices. So not only how the financial markets move or how the fed rates would move going forward, but also on capital 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 work on revenue management and price.

Q: 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 are you or you are about to implement to recover margins? And how do you ambition this recovery on margins?

A: Indeed, it's our short-term priority. I mean long term, you need to move 3 pillars to yield 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 3 pills growth, profitability and sustainability. Having said that, the priority for the next 6 months and the priority today is profitability and we're putting all our behind it. Cost expenses, number one, we have our HerCCUles plan devoted to be much more efficient on one hand, revenue management initiatives on the other control of 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, indeed, we could. But those are the main elements, and we are fully focused on this. That's our first priority for the more, but 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, important. I mean this is our number one priority.

Q: I have a question regarding Argentina. Could you clarify about what are you expecting in volumes and prices in the next quarter? Or if you are expecting some recovery on the end of this year or the beginning of 2025?

A: Thank you, Constanza. Extremely difficult to know exactly, look, if our volumes were handed before the beginning of crisis, and today, at 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 85, we could make profitable end of the year. But again, this is what we expect, we don't know exactly. Regarding price, as I explained before, we expect to move in line with inflation.

Q: My question is if you have another nonrecurring asset that can be put on sale as the land that we saw this quarter?

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

Q: I hope you hear me well. My first question is -- yes, so my first question is in light of this very uncertain scenario for commodities effects the company wouldn't be able to reconsider its policy not to hedge commodities and facts. So how do you see the benefits of the cost of hedges versus 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 this 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?

A: Thank you, Lucas, for your question. Look, regarding hitting now, we have a very clear policy, and we do not hedge raw materials. I mean because you have 12 termites,你 had or you do not yet -- 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, there's 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, 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 visibility indeed. So我们 are very clear on this. We do not hedge and we will not hedge. Regarding premium, it's very it's very strange that 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 fans, people have a lot of men in their pockets and the premium down to 60%. Now premium decreasing to 50%, but still much better than much better than it was in 2019. And we have we have decreased the percentage of premium in the last month from 53% to 50%, 49%, and we expect it to stay in that in that level. I prefer we assume that no major changes are going to happen in the rest of the year.