Compania Cervecerias Unidas SA
SGO:CCU
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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.
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.
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.
Thanks so much. Hi, Felipe, Carlos, Claudio thanks so much for the specific question. So I had two quick questions here. So first, if you could maybe walk us through a little bit if there's any need for additional price increases, mainly in Chileans operations, see how that dynamic is going a little bit understand how the consumer in the market is reacting to those increases that you have been rolling on for some quarters now? And the second one, maybe if you can walk us through a little bit on the plan that you have for the wine business, obviously was a challenging quarter, but any short-term actions that you have mapped out there to kind of have some relief there on the pressure that we saw during the work? Thank you so much.
Thank you, [indiscernible] for your question. Regarding pricing, yes, this was read area and this is in line with our HerCCUles pillar number two to enhance our revenue management efforts. As we stated in previous calls, we wanted 2023 in good shape in terms of prices in order to compensate our cost inflation in our P&L.
In quarter three, prices evolved in line with the industry and we did an additional price increase in both beer and melancholy during in April. So how the consumer is reacting to that, you notice a small decrease in terms of volume overall of 1.1%. So, I would say that our feeling is that the consumer is pretty resilient, let's say given the price increases because I will remind you the high comps that we had over last year first quarter when volumes review mainly in Chile.
So, I would say the week together, pillar number two of HerCCUles of enhancing our revenue margin efforts. We weren't more or less able to fulfill also pillar number one that is to maintain our absolute scale in the business. So I would say this is only the first quarter of the year. Going ahead, we need to see how this will evolve.
Regarding the wine business, yes, we need to enhance our HerCCUles plan within the wine business. For sure our volumes are suffering in the export markets, as you notice, volumes dropped more than 20% in the export, and this is mainly due to reduction of inventories of our clients and distributors in the north hemisphere.
So, how will we overcome of this situation, I would say we need to enhance our commercial efforts, so in key markets, such as England, such as U.S., such as China and especially in China. And we need to work in our mix also, because also our mix deteriorated during the first quarter. So, improve execution, these are the tools. Certainly, we face a difficult global scenario, not only due to this inventory reduction, but also due to a lower wine consumption in the world.
So willing to at the end to compensate that also through efficiencies in the bottom-line, but this is in line with all the other units of CCU that is to enhance our efficiency plan particularly in one, but that would be our response. We face a complex scenario of the global wine industry.
Our next question comes from Mr. Henrique Brustolin from BTG. Please go ahead. Sir, your line is open.
The first one, in Chile, if you could comment a little bit, we saw this very good improvement in terms of your unitary clause in the division. So if you could comment a little bit, how much of these lower commodity prices are already reflected into these Q1 results or how much more you might still benefit from the current cost structure? That's the first one. And the second one also in Chile, you mentioned the negative mix effect. If you could just give more details in terms of if you mean by that the performance of beer versus non alcoholic, and within beer, if you could comment a little bit on how was the product mix, when it comes to the performance of premium brands versus mainstream core brands?
Certainly, we are with good headwinds in terms of cost pressures, especially when we come from very words such as what the two quarter three and quarter four of last year. But on a quarter-to-quarter days, quarter-on-quarter exchange rate is flat. So still we are not benefiting, I would say comparing quarter-to-quarter with the exchange rate. Certainly there are certain commodities that dropped the prices, especially in packaging materials aluminum. Certainly, this is helping mainly aluminum.
However, we have a bad news regarding our other key raw materials such as sugar as maybe you know, India suffered a very poor harvest in terms of sugar is a high consuming a globally of sugar. So, sugar prices are the futures now are traded at more than 200 extra U.S. dollars from 500 of last year to $700 or $500, $600 in international markets. So, we have it. On the one side maybe in the future if the macros are maintained, especially the exchange rate, we will certainly we have given the Company some a better cost.
Also, it's good to remind that in some key raw materials, we took a call to see decision to increase inventory such as PD such as more, but this inventory is being depleted is being reduced. And we accepted especially in PP to benefit from slightly better prices in the second semester. So, you commentaries, okay in terms of facing lower cost pressure, especially at the up in the next quarter, if the exchange rate of the Chilean pesos is maintain.
Your question regarding mix, yes, I made the commentary we will use the volumes in the Chile operating segments reduced by 1.1%. I would say we have a high cont in beer and beer reviews volumes, low single digit being not as flat. We had some fire scene in Chile during February and very unfortunate situation. This high temperature in March, this certainly served the non-alcoholic business to be flat in terms of volumes. And within a beer, the mix of beer I would say although we'll keep a momentum in terms of playing however, if lower than the fear. So, the breathing reduces the percentage within the whole mix compared to the next one.
This is what we call overall mix effect in the performance. So despite that, despite what I'm talking about the mix, net prices increase I would say practically 8% during the quarter.
Next question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.
Both of my questions were asked and let me do follow ups on them. So the first one on the message and they could just asked. So you discussed beer versus knobs and you discuss to my station. Just wondering if you can address, packaging mix and channel mix, how those have evolved. And then my other follow-up would be on the wine question that was asked earlier on. So what's happening is clearly global and industry, we're seeing a reduction of inventories everywhere, not just Chilean peers that we're seeing it with us peers as well. Just wondering what your view is on the direct question of that inventory correction, do you think most of it has already happened and we're sort of done? And then also I wanted to ask, if you've seen that correction and inventories more pronounced in certain regions? Not sure if maybe China's picking up or other regions are reducing their inventories? Just wondering if there's a difference across regions? Thank you.
Let me start by the last question regarding the wine. Inventory reduction is all across the board, because with high interest rates globally and also because we came from very high levels of inventory because you are aware that during the pandemic, clients and router increase their inventory policy, given the short patch that we had in freight. So this reduction of inventory has two main drivers, one higher interest rates and the second one is bad, because they had massive inventory increase in the past, even the logistics.
It's difficult to know, how much is inventory, so we know that this inventory for sure, as of today, but also there is a reduction in the button, we don't have this because, we export to more than 80 markets to have an overall setting in the next month we'll be having a clearer picture in terms of an industry reduction, global industries reduction of wine consumption. So that's the situation regarding the wine.
Regarding the mix, I think the mix affecting beer is mostly interested brands. And that is -- but it is good to remind that we came from very high premium mix in the past. Certainly, the consumer has less money available, again, less affordability. So, there is a number of consumers moving from premium brands to consume mainstream brands.
However, I would like to say that before the pandemic the premium mix was in the high-20s, let's say, 30% and it jumped at the peak of after the pension from growing Chile to a number above 50%. Now it moved to 40%. So it still we have a higher premium mix brand before the pandemic. Regarding the movement of channels, it moves but knocking [indiscernible].
That's very clear. That's the only conceptual answer that. Maybe if I can ask just one follow-up on the underlying issue, would you say that the sell out is as solid as it have been? I mean, clearly the weakness is on the selling but how's the sell out outperforming?
Yes, the sell out are not performing badly, let's say. So as of today is mainly related to inventory reduction. However, in the first part of the quarter, sell out were solid but in the last month it reduced its running right the sell out.
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?
As we said, we have increased prices especially last quarter of last year. We entered with better prices in the quarter. And the demand more or less, or the scale of the business in Chile was maintain, because reducing the volumes by 1.1% with a very high comp, because I would remind you that volumes last year in the first quarter grew 7.1% overall, for the overall business.
So that's -- but then in quarter two, quarter three, it's a start a reduction in terms of volumes. So given the price increase, I would say that the volumes are we feel that they are resilient. Of course we will not grow, otherwise that we grow in 2021 when we have you know, the pension funds withdraw in Chile I mean it boost in terms of consumption.
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.
Yes, it's regarding the white segment ensure the same trend in quarter two in terms of volumes up with us we have had in quarter one. I think it's still we had a negative volume in April. However, just in May it improves because of the destocking of clients is finishing. But it would be very difficult to compensate all over the year the inventory reduction that impacted volume here in the first quarter?
And then, the other question is about the Chilean operating segment. Could you give some color in the recent trend in volumes in quarter to 2023? A, still we are in the middle of the quarter. It would increase prices in both non-alcoholic and beer business. So, we had a boost in volumes in April, but we think it will stabilize in May and June. Certainly, we don't do for overloading but still 50% of the quarter is not completed. But we expect that we will grow volumes because quarter two of last year was the worst quarter in terms of competitors.
Next question we have is from Fernando Olvera from Bank of America. Please go ahead. Sir, your line is open.
I have two. The first one is regarding related to Chile. How are you thinking about marketing expenses the remaining of the year given a more modest demand versus last year? And when do you expect the low base comparison to finish? And I'll wait for the second question.
It's very specific your question. So let me first strategically number six of HerCCUles a state we will enhance and protect our brand equity. So, every efficiency we do in the [indiscernible]. It is not a dispense marketing expenses. We will continue investing behind our brand. Regarding the comparison of that was particularly first quarter of last year, marking sessions due to facing what particularly low, but in this quarter is the marketing expenses are in the normal case. But let me emphasize that we'll continue investing, aligned with our pillar number six of HerCCUles behind the brand. I think, you have Fernando a second question, right?
My second question is related to the international business. Now as you can comment, what was the performance between premium and non-remium beer brands and how do you expect volume to behave the remaining of the year? Thank you.
I think the situation with the international business is a little bit different than in Chile. Particularly there are two markets that were volumes are suffering, especially Argentina given the high inflation, certainly the consumer has less money available and Bolivia also, particularly Bolivia, also is suffering from an industry reduction.
Order value is more healthy and Paraguay was affected by this tropical disease during the first quarter. So, we hope we all would be in better shape in the upcoming quarter, but the volume of reductions mainly in Argentina and Bolivia.
And what is your expectation? I mean, in terms of volume going forward after the decline we saw this first quarter?
In international business, you mean?
Yes, the international business. Thank you.
Yes, I would say Argentina has still the same fundamentals in terms of high inflation, a potential devaluation. So, I think we will not see a recovery in terms of volume in Argentina, while pricing would be in line with inflation?
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.
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.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you very much. Goodbye.