Compania Cervecerias Unidas SA
SGO:CCU
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Good day, everyone. Welcome to CCU's 2Q '19 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir.
Thank you. Welcome, everyone, and thank you for attending CCU's Second Quarter 2019 Conference Call. Today with me are Felipe Dubernet, Chief Financial Officer; Nicolás Novoa, Financial Planning and Investor Relations Manager; and Carolina Burgos, Investor Relations Senior Analyst.
You have received a copy of the company's consolidated second quarter 2019 results. Felipe will 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 risk 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, Claudio, and thank you, all, for joining us.
Before moving to our quarterly performance, it is important to mention that all variation against last year and second quarter 2019 ratios that I will be talking about exclude the effects of the CCU Argentina and Anheuser-Busch InBev ABI transaction, which took place in the second quarter of last year.
During the second quarter of 2019, CCU's consolidated volumes increased 1.4%, while EBITDA was down 9.8%. Consequently, EBITDA margin deteriorated 170 basis points to 13.7%. The weaker financial results were mainly explained by the high depreciation of the Chilean peso and the Argentine peso against the U.S. dollar, increasing our U.S. dollar-denominated cost, and by the absence of prices increases in Argentina during most of the first half of the year, limiting our capacity to offset the impact of inflation on our cost and MSD&A expenses.
These effects were partially compensated by efficiency gains from the financial CCU program and the implementation of revenue management initiatives. In fact, the drop of CLP 5,611 million in EBITDA was caused by the fall of CLP 10,263 million in International Business Operating segment, while we post a positive turnaround in the Chile Operating segment, where EBITDA rose to CLP 2,099 million and CLP 1,011 million increase in the Wine Operating segment.
In terms of net income, we increased 45.1%. This result was affected by 4 mostly nonoperating effects in Argentina, 3 positive: a tax asset revaluation, the application of IFRS 3 on the recent wine asset acquisition and the application of inflation for tax purposes; and 1 negative: The application of hyperinflation accounting, with a net positive impact of CLP 7,123 million. Excluding the aforementioned impact, net income would have decreased 12.2%.
In the Chile Operating segment, our top line rose 3.2%, with volumes expanding 2.2%, in line with the economy. Average prices were up to 1%, comparing positively with 0.9% decrease in the first quarter. This is the first result of our revenue management initiatives that allowed us to raise prices in a still highly promoted industry.
Gross margin dropped by 142 basis points, mostly due to the higher U.S. dollar-denominated cost from the weaker Chilean peso. However, we were able to compensate the increase in COGS with efficiency gains in MSD&A expenses, which as a percentage of net sales improved by 135 basis points. Accordingly, EBITDA expanded 4.8%, posting a positive turnaround when compare with the 8% drop in the first quarter of 2019. As a result, EBITDA margin jumped 29 basis points to 19.6%.
The International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, reported volumes that rose 1.5%. Excluding Bolivia, volumes were down 6.5%, explained by the industry contraction in Argentina associated with both a high comparison base in the second quarter of 2018 and a weak economic scenario.
Net sales declined 2.1%, explained by the 3.6% average prices drop in Chilean pesos due to the impact of the depreciation of the Argentine peso against the Chilean peso and the absence of the already mentioned prices increases during most of the first half of the year, which at the same time, limited our capability to offset the exchange rate pressure on our U.S. dollar-linked cost and the negative impact of inflation on expenses.
Accordingly, gross margin contracted from 53.3% to 42.8%. It is important to mention that it takes time to compensate for the sharp currency devaluation and high inflation in our results. In this regard, we took the first step, increasing prices in Argentina at the end of June. All in all, EBITDA decreased 94.3% and EBITDA margin deteriorated from 11.5% to 0.7%.
The Wine Operating segment posted a 1% increase in revenue, mainly explained by the 2.6% higher average prices in Chilean pesos, partially offset by a 1.6% drop in volumes. The low dynamism in volumes in this segment is explained by exports, mainly due by the higher competition we are facing in key markets where we operate. The higher average prices were explained by the positive effect of the stronger U.S. dollar against the Chilean peso and Argentine peso on our export revenues. The operating segment gross margin continued to recover this quarter with an improvement of 316 basis points from 33% to 36.1%, primarily associated with lower cost of wine against last year and higher average prices.
MSD&A expenses over total sales increased from 24.1% to 26.4%, mainly due to temporary marketing expenses, which concentrated in the quarter. All together, EBITDA grew 15% and EBITDA margin improved by 174 basis points to 14.3%.
In Colombia, where we have a joint venture with Postobón, we continue to post promising results after the launch of our locally produced beer Andina, which complemented our premium beer portfolio. Since March, we have seen gains in market share and a positive trend in volumes, reflecting the success of our marketing strategy in positioning the Andina brand, and most importantly, a positive acceptance from the consumer.
By the end of June, we more than doubled the volumes reached during the first semester of 2018. Furthermore, we started producing Tecate in our plant and entered the malt category at the end of July when we launched Natumalta. We expect to continue increasing points of sales and to implement our strategy that involves a focus on quality and to deliver the best experience to our clients and consumers.
Now I will be glad to answer any questions you may have.
[Operator Instructions] We'll now take our first question.
Just a question on Colombia. While I appreciate that the volumes are now increasing, my understanding was that the overall JV losses were not expected to accelerate significantly to beyond last year's levels. And clearly, in the first half, they've already achieved last year loss levels. I'm just trying to understand how we should expect the JV income to sort of progress this year and next year.
Hello. Could you state your name, please? I didn't hear or I think you didn't mention your name.
Sorry. My name is Mohammed Ahmad, FGP, we're a shareholder.
Hello, Mohammed. Thank you for your question.
Yes. In Colombia, as we stated, we are gaining share because of the launch of Andina and a continued solid performance of our premium brand there.
Regarding the results, the financial result, as you will understand, we are creating the brand image, the brand preference, and so we need to significantly invest behind the launch of Andina brand. So for this year, we will continue to heavily invest in marketing in Colombia to support the launch of the brand, so we are building this new mainstream brand or this new brand in Colombia. So we need to be -- to do this significant effort. And the payout will come certainly in the future, this is what we look forward. And so far, the results are very encouraging. We -- as we mentioned, we double our scale in Colombia in the first semester and the brand is doing really well. And still, we need to further expand along with the formats and points of sales to increase the sales.
We didn't commit to the market a specific target in terms of financial results for the next -- for the upcoming years. But certainly, with the production of the premium portfolio in Colombia, we will increase profitability in the future. And also, with the gains of scale that we are doing by gaining share in the market, certainly, we will be more profitable in the future. Okay. Mohammed?
That's great. So sorry, you said you've doubled your volume, it was that basically doubled your volume from Q2 last year to Q2 this year? And can you tell us what volumes you're...
Yes. The first half of -- we doubled the volumes we had first half of last year. First half of this year, we doubled that. And but bear in mind that we only launched Andina mid-February, so -- but we are really happy with that so far with the launch of Andina.
Okay. Are you communicating [ each ] day your current volumes, and B, your volume targets or volume share in the market or EBITDA margins?
As you know, see you do not communicate any future target at all, so answer your question. And we have already published in a -- on a yearly base, in our annual report, the volumes of this JV. Last year, we sold in Colombia 0.5 million hectoliter.
[Operator Instructions] We go to our next caller.
This is Pedro Pereira from Santander. For Chile, we observed a slower growth in prices and -- I mean, a slow growth in volumes and in prices increasing. This is the reverse of the past trend. I believe this is related with revenue management programs. I was just wondering, can we expect a similar trend from now onwards in Chile? Are volume growth going to decelerate and prices start to increase?
Thank you, Pedro, for your good question.
What I would say is that, in fact, in Chile in quarter 2, we kept some work, a good commercial balance because we continue to grow in volumes. At the lower pace, that in quarter 1, for sure, quarter 1, we grew 4.8%, and then in quarter 2, 2.2%. In my view, however, the economic balancing of the Chilean economy has slowed down a little bit. Maybe if you know. So I cannot predict what will happen in the second semester. I look forward that the Chilean economy with recovery, but we are in a very volatile environment, especially now with the devaluation of the currency. So our margins will continue to be under pressure. So revenue management initiatives are key.
But as you mentioned, thanks to revenue management, we have now in the second quarter a more positive pricing. In fact, it is positive by 1% compare to a negative pricing in quarter 1. And especially in a very promoted market, as we mentioned in previous conferences, the market continued to be very promoted especially in supermarket. So the challenge is to keep positive volume growth with commercial dynamism, while recovering margin through revenue management initiative, especially given the devaluation of the Chilean peso that impact our overall P&L.
Okay. Also if I may, a follow-up question. You've commented that you've increased prices in Argentina in June. I was just wondering, are these price hikes related to inflation levels or are those price hikes below inflation levels?
Thank you. It's Mohammed again, I think? Or Pedro?
Pedro.
Pedro. Thank you, Pedro, for your question. All right. Yes. So regarding Argentina, we increased prices, as we mentioned, by the end of June, but we are still below inflation's level, I mean accumulated inflation level since December last year. So still, we need to catch up inflation and currency devaluation in Argentina, but it was a first step to start the recovery of our profitability there.
[Operator Instructions] Did have a few more questions queue up.
I'm Fernando Olvera from Bank of America Merrill Lynch. I have one related to Argentina. How should we think about volume behavior going forward? I mean given your pricing strategy, it seems that you still have to increase prices again. And also concerning that the comparison that you will face is going to be tough in coming quarters. That's my first question. The second one is related to Chile. Can you comment about the outlook on costs for the second half of the year? And how this as well as your ExCCelencia program could help you mitigate the FX pressure in coming quarters?
Fernando, for your question, regarding Argentina, the tougher comps were in the first semester. I would remember you that the economic crisis, there were -- or the devaluation crisis in Argentina started by quarter 2 last year when Argentina heavily devaluate end of -- beginning of May 2018. So the really tough comps were in the first semester. The comps in the second semester are, let's say, less challenging. However, I need to say that we are living in a very volatile scenario where, certainly, we need to further enhance our revenue management initiatives in Argentina, as I mentioned, to catch up inflation levels and currency devaluation. So this is the only thing I can say. I cannot give you, especially in Argentina, a look forward on what will happen.
Regarding your question, the outlook on cost. I would say, as you know, the dollar has appreciated a lot in Chile and consequently putting a lot of pressure on our input cost. And of course, we are working on efficiency programs, mainly at expenses level. And if you saw our P&L of the Chile Operating segment, we did a very good efforts in terms of MSD&A by reducing them more than 100 basis points as percentage of net sales, reflecting our capability of executing efficiency program, especially in our distribution operations. So it is one is -- of course, this is one source, the efficiencies to mitigate somewhat the impact of the input cost. But it takes long to recover profitability, as we stated, so we'll keep a big focus on revenue management, but also in efficiencies.
[Operator Instructions] We'll have another caller.
Hi. This is Henrique from BTG. I have just one in the Wine Operating segment. You mentioned that you had more marketing investments during this quarter, and I understand this is mostly related to improved volumes in export markets. So my question is, if we should expect this to continue going forward, this investment? And what you are seeing in term of volumes so far as a consequence of this?
Yes. So we face a very competitive scenario in the export Wine business, not only Viña San Pedro Tarapacá but the overall Chilean industry, and as particularly in some markets, such as Japan, okay. The statement about marketing especially was, of course, in the export market are more related to a phasing of investment because we have some particular initiatives during the quarter, okay. We are ready -- we'll be very disciplined in keeping control of our marketing expenses and investment with the high returns in terms of volume and profitability of our marketing investments in all the operating segment.
Regarding exports, I think we have -- we -- at the end of June, and especially in July, because we take our orders in June and then we ship them in July. We saw more positive signs in the Wine export segment in July. But it is, as you know, too close to call how it would evolve in the next few months, so -- but we saw some positive signs. So of course, quarter 2 was a weak quarter in terms of export volumes, as you mentioned. But with a recovery at the end of the quarter, in terms of the orders, we took from the export market that would certainly have a more positive impact in July sales and consequently quarter 3 sales. Okay?
All right. It looks like we have no further questions at this time.
Okay. If there is no further questions, I would like to thank you, all, for attending this session today.
In the second quarter, as I mentioned, CCU was able to partially offset significant external effects from the devaluation of local currencies by developing our strategy that aims to defend profitability through revenue management initiative and efficiency efforts. In total, we kept positive consolidated volume growth. We achieved an EBITDA expansion in the Chile and Wine Operating segment. And we were able to raise prices in Argentina at the end of the quarter.
During the second half of the year, we will continue executing our sustainable and profitable growth strategy, supported by a strong portfolio of brand, our continuous pursuit of operational excellence and our focus on innovation, marketing and sales execution. Have a very good weekend.
That does conclude today's conference. We thank everyone again for their participation.