Compania Cervecerias Unidas SA
SGO:CCU
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Good day, everyone, and welcome to the CCU's First Quarter 2021 Earnings Conference Call. Today's call 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.
Welcome, everyone, and thank you for attending CCU's First Quarter 2021 Conference Call. Today with me are Patricio Jottar, Chief Executive Officer; Felipe Dubernet, Chief Financial Officer; and Nicolás Novoa, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated first quarter 2021 results.
Patricio will now review our overall performance, and we will then move on to a Q&A session. Before we begin, please take note of our cautionary statements. 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 risk 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 the 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 my pleasure to introduce Patricio Jottar.
Thank you, Claudio, and thank you all for joining us today. During the first quarter 2021, we continued implementing a regional plan with 3 priorities during the COVID-19 pandemic. The safety of our people and the community we interact with, operation continuity and financial shares. This plan allowed us to operate and supply our products to our clients and consumers in a still very challenging scenario, where restrictions continue to be implemented across the region to control new outbreaks of the virus.
Within this context, as we have been mentioning since the beginning of the pandemic and stating in every quarter, we have put a special focus to maintain or to grow business scale with the purpose of gradually recovered profitability over time by implementing revenue management initiatives and efficiency. This strategy started to yield results in the fourth quarter of 2020 and showed a better result in this quarter, where in addition to continue growing our business scale in all our operating segments, we delivered an improvement in our profitability.
In terms of our performance in the first quarter of 2021, CCU's consolidated volumes grew 4.8% with an expansion in all our operating segments. This positive volume growth was mainly explained by a solid commercial execution and the strength of our portfolio of brands. Regarding financial results, EBITDA was up 39.5% and EBITDA margin improved by 147 basis points from 17.7% to 22.2%.
The better financial results was mainly driven by 4 elements: first, the expansion in consolidated volumes, as mentioned above; second, the implementation of revenue management initiatives and positive mix effects; third, efficiency gains from the ExCCelencia CCU program with MSD&A expenses as a percentage of net sales decreasing from 38.2% in percent to 34.1%; and 4, finance -- positive external effects from the 9.8% appreciation of the Chilean peso against the U.S. dollar, affecting favorably our U.S. dollar-denominated costs, partially compensated by currency translation effects, wine export revenues in foreign currency and higher cost in raw material. As a result of the above, net income recorded a 99.7% hike.
In the Chile operating segment, our top line expanded 15.2% due to 4.2% growth in volumes, revenue management initiatives and positive mix effects, mainly based on a strong performance of premium brands in beer, Volume growth was driven by all main categories. Gross profit grew 16.3% and gross margin rose 50 basis points to 52.7%, mainly as a result of the top line expansion mentioned about our positive external effect from the appreciation of the Chilean peso against the U.S. dollar, affecting favorably our U.S. dollar-denominated costs and efficiencies in manufacturing.
This was partially offset by higher cost in raw materials, MSD&A expenses as a percentage of net sales improved 497 basis points, in line with cost control initiatives to the ExCCelencia CCU program. In all, EBITDA recorded a 40.8% increase and EBITDA margin improved from 21.6% to 26.4%.
The International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, posted a 0.1% rise in revenues due to an increase of 5.1% in volumes, offset by 4.8% lower average prices in Chilean pesos. Volume growth was mostly driven by Argentina, lower average prices in Chilean pesos were explained by negative currency translation effects in Argentina from the sharp depreciation of the Argentine peso against the Chilean peso, as we executed revenue management initiatives to compensate local inflation.
The latter, in Argentina, allowed us to compensate higher U.S. dollar-denominated costs from the depreciation of the Argentine peso against the U.S. dollar and higher cost in raw materials. In addition to this, we have positive mix effects in the portfolio that allowed us a gross profit expansion of 9.6% and an improvement in gross margins from 45% to 49.3%. MSD&A expenses as a percentage of net sales improved by 209 basis points due to efficiencies from the ExCCelencia CCU program. Altogether, EBITDA posted an expansion of 68.5% and EBITDA margin increased from 8% to 13.4%.
The Wine Operating segment reported a 13.9% rise in revenues due to a 16.7% expansion in volumes as average prices contracted 2.4% during the quarter. The volume expansion was driven by both the domestic markets and exports, all posting double-digit growth with market share gains in domestic markets of Chile and Argentina. The lower prices in Chilean pesos were mainly a consequence of the appreciation of the Chilean peso against the U.S. dollar and its negative impact on export revenues and a negative mix effect.
Gross profit was up 4% and gross margin decreased 380 basis points, mostly reflecting lower average prices in Chilean pesos and a higher cost of wine. MSD&A expenses as a percentage of net sales improved by 344 basis points, thanks to efficiency. And all EBITDA rates and expansion of 5.6%, while EBITDA margin decreased from 19.5% to 18%.
Finally, in Colombia, where we have a joint venture with Postobón, we continued in a positive trend in volumes and financial results. In terms of volumes, we grew over 30% during the quarter. In terms of results, we have posted positive EBITDA for a second quarter in a row based on a higher business scale, the development of our beer portfolio and efficiency. We will focus on continuing on this positive path by developing a strategy that involves new consumer experiences, quality and innovation.
Now I will be glad to answer any questions you may have.
[Operator Instructions] We'll go first to Fernando Olvera from Bank of America.
I have 2, if I may. The first one is related to pricing. I mean, given the increase in commodity prices, how are you thinking about your pricing strategy going forward? How can this change your view about favoring volume growth? And when do you expect to face higher costs?
And the second question is about expenses. It was really outstanding, the efficiencies that you achieved across the operations. Can you comment from where did you obtain most of such efficiencies? And how should we think about expense evolution when mobility restrictions decline?
Thank you, Fernando, for your questions. You are right. I mean, regarding prices, we have a good revenue management execution, mainly by reducing discounts, reducing promotions and particularly, by improving the mix of our premium segments. But you're right, the cost of raw material is higher today. It's true that the exchange rate is lower, so 1 element compensate the other, and we need to cope with this in the future.
But again, short term, reducing discounts, reducing promotions and improving premium has shown a good answer to that. As you know, revenue management is a permanent focus of our ExCCelencia CCU program, and we are very focused again on this. What is going to happen with volumes in the future? Difficult to say, as you know. Because of the pandemic, most of the governments are expanding fiscally a lot and people are receiving money in their pockets on one hand. And on the other hand, they're reducing the expenses in other categories. So our categories have been favored by this effect. It's difficult to predict what is going to happen in the future.
But as always, our strategy is going to be the same as we have had for many years. Number one, to grow scale, our business is about scale, it's about volumes. You could, as you know, during 2020, we put a lot of effort in order to improve our scale and we finish the year increasing our consolidated volume by 2.2%, and we'll continue doing this. And at the same time, improving margins and at the same time, keeping our expenses under control.
Having said that, I move to the second question. Look, that it's true. I mean our expenses are under control, and we are doing a big effort in order to do this. We have an indicator, which is total expenses. It's DNA plus manufacturing as a percentage of income, not just MSD&A, but we are the manufacturing expenses. And if we -- and we began with the ExCCelencia CCU program at the end of 2013.
And if you compare the results since the very beginning to the results that we have today, we have improved a lot. In fact, this ratio in the Q -- in the first Q -- quarter of 2014 was 51.6%. This is MSD&A plus manufacturing expenses as a percentage of total income. Last year was 49.5%, this year, 44%.
And we are putting a lot of focus on this because we created the centers of excellence on the corporate level and the centers of excellence are permanently promoting a better execution and the best practices in 7 dimensions, in 7 areas: 1, logistics; second, manufacturing; third, procurement; fourth, marketing; 5, sales; 6, general expenses; and finally, 7, revenue management. So it's not a onetime effort. It's not that we are putting a lot of focus now on expenses, a permanent effort under the name of ExCCelencia CCU program in the 7 areas that I just mentioned.
And finally, the combination of volumes, margins and expenses are the key to build profitability in our business. I mean, our business at the end of the day is not too complicated. We need volumes, we did margins, we need to keep expenses under control. And this is our permanent effort, and this is what we'll continue doing in the future.
[Operator Instructions] Next, we'll go to Henrique Brustolin from BTG.
Two questions on my side. The first one, in terms of -- hello?
Yes. Hello, If you -- excuse me, Henrique, please. Go ahead.
Okay. I'm sorry. The first one is in terms of pricing in Chile that we saw a very strong growth, and you mentioned the positive mix impact. So I just wanted to hear if there were also any price increases in the quarter? And how was the relative performance between the alcoholic and nonalcoholic segment? And we think the alcoholic segment premium performed very well, but how that compared to the mainstream portfolio. So I think it would be very helpful.
And the second question is in terms of competition, right? So this is the first quarter that ends and coat borders fully operated under the new distribution agreement. And then I just reported 20% plus volume growth in Chile. But I'm unsure about the comparison basis, but just wanted to hear from you guys if you see any changes in the competitive environment in Chile, in different channels since the distribution agreement started? And also if you could give some color on market share performance, I think it was bigger in health.
Yes. Thank you, Henrique, for your question. You are right, they reported 20% or more growth in volumes in 2 years because, I mean, the first Q of 2020 was a very strange quarter. So the real comparison is first quarter 2021 compared with first quarter 2019. And they announced that they grew by 20% and in the same basis, we grew in our beer portfolio and more than 20%. In fact, it has 24%...
25%
25% comparing again Q1 2021 with Q1 2019. And if you take a longer period of time, let's say, 4, 5 years, our market shares with ups and downs have been rather stable in there as we have been gaining market share in nonalcoholic.
Look, regarding competition, indeed, to have the Coca-Cola system distributing the beers of our competitors is something important. I mean, Coca-Cola is a fantastic operator, and they have a fantastic distribution network. But let me say that to become a real multi-category operator is much more than put new products on Europe and U.S. historical distribution. This is with the beginning or this is the first step of a multi-category process, but this is not a real multi-category strategy. A real multicategory strategy needs a philosophy, a culture, meets processes, KPIs and a lot of tools in order to put the same focus in a 2 million or 3 million hectoliter brand than you have in 1,000 hectoliter brand. This is a real philosophy behind multi-category. We have been running a multi-category operation for 20 years.
At the end of the day, our competitor, Coca-Cola is going to learn how to do this. But believe me, this is not a short-term journey. It's a long-term journey. Having said that, we respect them a lot.
Regarding alcoholic products, it's true. We have been improving the percentage of premium in our portfolio a lot in the first quarter of 2021 premium products in the beer in our beer portfolio represented more than 40% of our volumes. Two years ago, that was 25% to 30%. We have been increasing -- we have been increasing this, which is good because it improves our profitability. But at the same time, it's a challenge because there is much more competition in this segment, it's much more difficult to defend -- to grow market share in premium rather than in mainstream. But this is our job. This is our everyday job.
[Operator Instructions] And we have no further questions in the queue. So I'll turn it back to Patricio Jottar for closing remarks.
Perfect. Thank you very much. Summarizing, during this first quarter 2021, it has still challenging scenario due to the pandemic. CCU continued developing a regional plan with 3 priorities as I mentioned before: #1, the safety of the people; #2, the operation continuity; and #3, the financial health. At the same time, the strategy implemented in this context gave positive results during the quarter, where we delivered volume growth in all the operating segments and a recovery in our financial results. The latter with an improvement in our profitability.
In 2021, we'll continue to face a challenging and uncertain scenario due to new outbreaks of COVID-19 in the region. In this context, we'll keep executing with a lot of discipline. The strategy that we have been carrying out in order to continue delivering profitable and sustainable growth.
Thank you very much, all of you, for attending this call.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.