Compania Cervecerias Unidas SA
SGO:CCU
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Earnings Call Analysis
Q2-2024 Analysis
Compania Cervecerias Unidas SA
In the second quarter of 2024, CCU faced significant difficulties that affected its financial performance largely due to unfavorable weather conditions in Chile and Argentina, along with major currency depreciation. The company reported an overall revenue contraction of 8.6%, primarily due to a 12.7% drop in volumes. This decrease can be attributed to adverse weather impacting beverage demand, particularly beer. However, average prices were lifted by 4.6% as a result of revenue management initiatives, but these efforts were not sufficient to offset the volume decline.
The depreciation of the Chilean peso and the Argentine peso had severe implications, with the Chilean peso losing 16.8% and the Argentine peso plummeting by an alarming 255.1% against the U.S. dollar. This led to significant cost pressures on the company’s operations as many expenses are dollar-denominated. Specifically, the Exchange Rate impacts accounted for approximately CLP 16 billion of the EBITDA decline, underscoring the challenges posed by external economic environments.
CCU's EBITDA saw a dramatic decline of 78.7%, dropping from CLP 47 billion in the previous year to just CLP 10 billion this quarter. The gross margin also deteriorated significantly to 37.5%, down from 46%, primarily driven by increased U.S. dollar-denominated costs. The company’s net income turned to a loss of CLP 15.9 billion, contrasting starkly with the previous year’s performance.
In the Chile Operating segment, revenues dropped by 5.5%, primarily due to an 8.4% decrease in volumes; average prices were up 3.1%. The beer category was particularly hard-hit by the unusual cold and rainy weather. Conversely, the Wine Operating segment reported a 12% increase in revenues, primarily driven by a 11.9% rise in average prices, as exports recovered strongly despite a decline in domestic sales. The International Business segment saw a steeper decline of 22.1% due to a 27.2% drop in volumes, especially in Argentina.
Looking forward, CCU has emphasized its priority to restore profitability. The company has initiated the HerCCUles plan aimed at enhancing cost efficiency and managing expenses rigorously. They are also focusing on revenue management initiatives as part of their strategy to navigate through this challenging economic phase. The company expects volumes to improve in Q4 2024 to about 85%, signaling a potential recovery pending overall market stabilization.
Regarding operational costs, while the company anticipates that some raw material costs may stabilize, they also face ongoing challenges due to inflation and currency fluctuations. Effective strategy implementation in managing pricing is vital as they aim to recover margins concurrently, considering the competitive landscape where pricing has become a critical lever for profitability. Thus, the outlook for the remaining year remains cautiously optimistic, focused on adapting to market dynamics.
In anticipation of improving market conditions, CCU is dedicated to maintaining operational capabilities through strategic initiatives, including workforce optimization and efficiency improvements in distribution systems. With the transition to their own distribution model in Argentina proving successful, the management is optimistic about solidifying further controls to drive profitability across their product categories.
Good afternoon, everyone, and welcome to CCU's Second Quarter 2024 Earnings Presentation Call on the 8th of August. Please note that this call is being recorded . [Operator Instructions].
So without further ado, I would now like to pass the line over to Claudio Las Heras Olivares, Head of Investor Relations at CCU. Please go ahead, sir.
Welcome, everyone, and thank you for attending CCU's Second Quarter 2024 Conference Call. Today with me are Mr. Patricio Jottar, Chief Executive Officer; Mr. Felipe Dubernet, Chief Financial Officer; Mr. Joaquin Trejo, Financial Planning & Investor Relations Manager; and Carolina Burgos, Senior Investor Relations Analyst. You have received a copy of the company's consolidated second quarter 2024 results. As usual, Patricio will now review our overall performance and we will then move into a Q&A session.
Before we begin, as usual, 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. 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 Mr. Patricio Jottar.
Thank you, Claudio, and thank you all for joining us today. In the second quarter of 2024, CCU's financial results were much weaker than last year as they were heavily impacted by 2 effects: a particularly difficult context for demand in Chile and Argentina, and the depreciation of our main local currencies.
In Chile, the industries of our core categories, particularly beer, decreased largely explained by adverse weather conditions with unusual low temperatures and record rainfall during the quarter, particularly in May and June. In Argentina, we faced a sharp contraction in the economy and in the beer industry associated with a challenging context for consumption. It's important to mention that we maintained overall market share in both countries.
In terms of our main local currencies, the Chilean peso and Argentine peso depreciated 16.8% and 255.1% against the U.S. dollar, respectively, increasing our U.S. dollar-denominated costs impacting our operating results. In this scenario, on the original plan, HerCCUles, further actions in terms of revenue management and costs and expenses control are currently in place. These actions in a more normalized context of volumes growth should help us to return to the profitability path.
During the second quarter of 2024, our revenues contracted 8.6%, fully explained by 12.7% volume drop, partially compensated by 4.6% higher average prices in Chilean pesos. Lower volumes were largely caused by a weaker demand in Chile and Argentina, as I explained before. Average prices were higher due to revenue management initiatives in all operating segments.
Gross profit was down 15.8% and as a percentage of net sales deteriorated by 338 basis points due to higher cost pressures, mainly coming from depreciation of the Chilean peso and the Argentine peso mentioned above. MSD&A expenses expanded 1.7% and as a percentage of net sales deteriorated 464 basis points, mainly as a consequence of lower volumes and its negative impact in fixed expense dilution.
In all, EBITDA reached CLP 10,053 million, a 78.7% decrease and EBITDA margin contracted 629 basis points. Net income reached a loss of CLP 15,888 million. These figures do not consider the nonrecurring gain from the sale of a portion of land in Chile with a favorable effect before taxes of CLP 28,669 million and after tax at CLP 20,928 million. Including this nonrecurring effect, EBITDA totalized CLP 38,722 and net income reached a gain of CLP 5,040 million. The following analysis also does not consider this nonrecurring event.
In the Chile Operating segment, top line contracted 5.5% driven by 8.4% volume drop, partially offset by 3.1% growth in average prices. Volume contraction was caused by weaker demand due to unfavorable weather conditions in the quarter, particularly in the beer business. Nonetheless, we saw a much better performance in, July being a good sign for volumes looking ahead. Average prices were higher driven by revenue management efforts in all our categories, partially offset by negative mix effects in the portfolio.
In this regard, in July, we implemented additional price actions. Gross margin decreased as a result of higher cost pressures, largely coming from our U.S. dollar-denominated costs. MSD&A expenses were flat due to efficiencies that helps to compensate higher U.S. dollar-denominated expenses. Consequently, EBITDA totalized CLP 26,587 million, contracting 39.7%.
In International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales recorded 22.1% drop as a result of 27.2% reduction in volumes, partially offset by a 7% rise in average prices in Chilean pesos. Weaker volumes were mostly concentrated in Argentina. On the other hand, Paraguay and Bolivia expanded volumes, while Uruguay dropped due to a high comparison base explained by an uncommon drought in 2023, which boosted back to water consumption in that year.
The better average price in Chilean pesos were driven by revenue management efforts in all the countries, partly offsetting strong cost pressures mostly coming from the sharp depreciation of the Argentine peso against the U.S. dollar and its impact in U.S. dollar-denominated costs. Consequently, gross margin deteriorated from 46% to 37.5%. MSD&A expenses increased 3.3% and as a percentage of net sales deteriorated mainly due to the lower business scale in Argentina. Altogether, EBITDA reached a loss of CLP 24,373 million.
The Wine Operating segment continued in a recovery trend, with revenues expanding 12%, driven by 11.9% higher average prices. Volumes showed a strong recovery in exports from Chile, which expanded 9.1%, while the Chile domestic market was down 5.4%. The better average prices were boosted by the weaker Chilean peso and its favorable impact on export revenues and revenue management initiatives in our domestic markets. Gross profit rose 28.5% and gross margin improved 511 basis points. MSD&A expenses increased 12.4%, mainly due to higher marketing expenses related to exports which are denominated in U.S. dollars and as a percentage of net sales remained flat. In all, EBITDA increased 59.2%.
Regarding our main joint ventures and associated business, in Colombia, volumes increased mid-teens, driving better financial results. In Argentina, our water business with Danone recorded contraction volumes due to the challenging scenario for consumption. Nonetheless, financial results improved versus last year due to efficiencies from a successful route-to-market and back office integration with CCU Argentina.
Now I will be glad to answer any questions you may have.
[Operator Instructions] First question comes from Mr. Felipe Ucros from Scotiabank.
Patricio and team, 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 nonalcoholic beverages. But in my mind, when it's cold and the consumer drinks beer and nonalcoholics, 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 do you think weather was a bigger effect here? And then I'll do a follow-up.
Thank you, Filipe, for your question. Look, if we double click the volumes in the domestic industry feeling this and we find differences among the different categories. In fact, while we are keeping market share in terms of the different categories so the figures of CCU represents the figures of the industry. In the case of beer, I mean so the whole Chilean segment decreased by 8.4% its volumes, as I mentioned before. But there are differences. In the case of beer, the decrease was in the mid-teens while in the case of nonalcoholic, the decrease was mid-single digit. So something like 5% in the case of nonalcoholics, something like 14% in the case of beer. So as you could see, there is a strong difference. In both cases, we are keeping market shares.
You're right, when the weather is not good, wine and spirits benefit from this. In fact, the volumes of speed decreased by something like 5% and the volumes of wide 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 was worse in the last 20 years and rain by far, the worst in the last 20 years, making a strong effect, particularly in beer, which is very sensible on temperature 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 whether 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, single digit 2%, something like 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 and Q2 2024 were extremely, extremely extreme because of the conditions I just mentioned.
Great. And my second question is on competition. Last quarter, I asked about the rationality in the market. And as of your competitors were moving prices with inflation, it seems that they were not moving at the speed or at least not the same magnitude as CCU. You announced in your release that you increased prices in July. Have you seen your competition follow you this time around?
Look, Felipe, I think that there is a lot of rationality in our market, 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 and nonalcoholic 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 nonalcoholic. But we have not been able to catch up with enormous pressure on direct cost. So we need to continue making efforts to improve prices to recuperate margins and we are moving in that direction and the industry as a whole is moving in this direction.
Okay. That's clear. Any indication that your competitors have followed after your increase in July?
So I mean, I prefer not to double click on that 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 in Chile. It's all over the world, but I prefer not to discuss on what is happening today in the market. But I remain positive on our ability to recuperate margins, let me say this.
Got it. Yes, it's 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?
Look, we are extremely happy. We made all the integration of the distributions in August, September, October 2023. This 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. By incorporating the Danone 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 100% paid in our P&A last 2023 and the results are extremely good and satisfactory. We are very happy on our ability to run a joint distribution, putting together today beer, wine, cider and water. And we are extremely happy on this, particularly in the case of water. We are running at 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 this month or next month. We are not consolidating this, but while we consolidate, we expect to have positive EBITDA and positive net profits mainly because we transform all the fixed costs of the water operation into variable cost by incorporating it in our platform.
How is the year 2024 in terms of volumes for the categories? In Argentina, it's extremely poor. I mean, the beer category is increasing its volume by 30%, the water business or the water category is same thing. We are keeping, roughly speaking, our market shares there. But when volumes decreased by 30%, everything in terms of results become 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.
Next question is from Mr. [ Pedro Seixas from Neuberger Berman ]. Mr. Pedro, your line is open, in case you're muted. Okay. We'll come back to Mr. Pedro Seixas in a moment. In the meantime, we'll take Mr. Alvaro Garcia from BTG Pactual.
Patricio, a question on Colombia. The volumes there were quite strong relative to how the economy is doing. I was wondering if you can comment on initiatives in Colombia for that JV? And then just a follow-up on Argentina. You mentioned share was stable. I was wondering if you can comment if that was a volume share, value share? My sense is if you maybe lag on pricing now and gain volume share, you could be in a much better position coming out of the crisis, but any clarity there would be very helpful.
Thank you, Alvaro, for your questions. Regarding Colombia, yes, it's true, we are growing our volumes by 50%. We are gaining a little bit of market share. And I mean we make public -- we made public the results in terms of net profit, but EBITDA has been positive year-to-date, and we expect to have a much better result in the last part of the year because most of the volume comes from October, November and December. I mean it's tough. It has been tough, I guess the tough credit in Colombia, but we are moving in the right direction. We're very happy on this.
Regarding Argentina, yes, our -- I mean, our volumes and our market share in terms of volumes and in terms of value are in the same direction. Look, in 2023, our prices were increased by 11% more than inflation, 10% or 11%. I mean inflation is 200%. It's very difficult to know exactly or to cover exactly your prices with inflation. But let's say that we gained a little bit or we took a little bit of advantage on inflation. In 2024, we are losing 6 or 7 points compared to inflation. So if you put together '23 and '24, we are at 3 points above inflation.
The industry as a whole is moving in the same direction but it's not a good idea to decrease prices in order not to lose volumes because if you do this at the end of the day, it's going to be extremely difficult to recuperate prices. I prefer to move prices in line with inflation and do our best effort to keep our scale and trust that the economy will resume normality and growth. We expect soon later, but it's really very difficult to know when it's going to happen.
We'll go to Mr. Pedro Seixas, Neuberger Berman. He typed his question. I was wondering if you could elaborate on how much exactly the FX fluctuation impact the 78% drop in EBITDA? How much of the 78% was to do with the FX depreciation? And how much has to do with the volume decline?
See, we have the precise calculation. I will ask Filipe to give you the right figures, Pedro.
Thank you, Pedro, for your question. At the consolidated level, our EBITDA reduced from CLP 47 billion last year second quarter to CLP 10 billion in the second quarter of this year. So the difference is CLP 37 billion. Of this, the external effect, as we call. So that's the combination of exchange rate in Chile. So the Chilean peso depreciation against the U.S. dollar offset somewhat due to some positive effect on raw material cost in U.S. dollar. This affected in total about CLP 16 billion in a negative direction. So this was the hit of our results in quarter 2 by exchange rate, somewhat compensated with better prices in PET, aluminum cost and [ mold ] cost.
On the other hand, our operating variables such as price that was positive, but not enough to compensate the input cost and volume very negative. We reduced the volume overall at a consolidated level by 13% and compensated with some efficiencies, especially in logistics, the impact of this operating result was about CLP 21 billion negative. So the main causes of the EBITDA decline were due to: first, external effects, about CLP 16 billion and volume offset somewhat by price and efficiencies of about CLP 21 billion negative. That is the bridge of the EBITDA.
[Operator Instructions] Nicolas Donoso, we did notice your question from online. In case you have a question, your line is open. Nicolas Denoso from Compass Group Asset Management. [Operator Instructions] We have a question from Fernando Olvera from Bank of America.
My question is related to cost. If you can share what is your outlook for the remainder of the year given that packaging and sugar costs are down, although the Chilean peso has depreciated versus the U.S. dollar. And I have another question, but I'll wait.
Thank you, Fernando. We'll ask also Felipe to discuss on cost of raw materials and what we expect for the next -- for the rest of the year.
Thank you, Fernando. In terms of raw materials, somewhat you are right, the sugar has been softer a little bit, but still is higher than last year. So we continue to be higher, and we saw a better outlook in the future than the last time. The other downside that we have in raw materials or higher cost is pulp. Orange juices are at a record highest cost especially due to Brazil. For the rest, it's 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 2 months, the Chilean pesos moved from high 900, let's say, close to 1,000 below 900. So this week also was especially volatile, in line with the overall market. So it's 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 will 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 copper prices, so difficult to predict. So this is the reason why we took actions in terms of prices because all the markets, 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.
Highlighted in the press release that recovering profitability is your short-term priority. So can you share what additional measures? Have you already implemented or you are about to implement to recover margins? And how do you ambition this recovery on margins?
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 and all our efforts 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 do this. But those are the main elements, and we are fully focused on this. That's our first priority for tomorrow, it's 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 #1 priority.
Our next question comes from Ms. [ Constancia Gonzales ] from Quest Capital.
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?
Thank you, Constancia. 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.
Next question comes from Ms. [ Sophia De Guerra ] also from Compass Group.
My question is if you have another nonrecurring asset that can be put on sale as the land that we saw this quarter?
No, we expect not to have something like this in the second half of the year.
The next question comes from Lucas from JPMorgan.
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?
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 two alternatives, you hedge or you do not hedge. If you do not hedge, you face the spot curve of prices. If you hedge, 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, if you think that 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 that we do not have visibility indeed. So we are very clear on this. We do not hedge and we will not hedge.
Regarding premium, it's very it's very stranged 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.
We have a question from [ Nicole Helm ] from MetLife Investment Management. Okay. We'll come back later. Next question is a follow-up question from Alvaro Garcia from BTG Pactual.
Sorry about that. I meant to ask about COGS and then I meant to ask about the Chile volumes, but both of those questions have been answered.
[Operator Instructions] It looks like we have no further questions at this point. I'll be passing the line back to the management team for the concluding remarks.
Thank you very much. To conclude, I would like to reiterate that our second quarter of 2024 results were very weak and were negatively impacted by a particular difficult context for demand in China and Argentina and the depreciation for main local currencies, which resulted in higher cost pressures. Given this scenario, we are confident that our multi-category beverage strategy based on focus on synergies should help us to return to the profitability path, which is our short-term priority going forward, as I mentioned during the conference call. Thank you very much for attending.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.