Compania Cervecerias Unidas SA
SGO:CCU
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Good day, everyone, and welcome to the CCU's Third Quarter 2024 Earnings Conference Call on the 7th of November 2024. Please note that today's call is being recorded.
At this time, I would like to turn the conference call over to Claudio Las Heras, the Head of Investor Relations. Please go ahead, sir.
Welcome, everyone, and thank you for attending CCU's Third Quarter 2024 Conference Call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; also Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager; and Ms. Carolina Burgos, Senior Investor Relations Analyst.
You have received a copy of the company's consolidated third quarter 2024 results. As usual, Felipe will review our overall performance, and then we will move into a question-and-answer session.
Before we begin, please take note of our cautionary statement. The statements made in this conference call that relate to CCU's future 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, 20-F form filed with the U.S. Securities and Exchange Commission and in the annual report submitted to the CMF and available in our website.
It is now my pleasure to introduce our CFO, Mr. Felipe Dubernet.
Thank you, Claudio, and thank you all for joining us today. In the third quarter of 2024, CCU moved forward to recover profitability and financial results, which is our main priority. In our main operating segment, Chile, we posted a positive turnaround in volumes, EBITDA and EBITDA margin, mainly as the result of revenue management initiatives and costs and expenses control efforts.
In the Wine Operating segment, we kept an upward trend in EBITDA, mostly driven by a favorable U.S. dollar and efficiencies. On the other hand, in International Business Operating segment, results were weaker than last year, as we faced another challenging quarter, mostly associated with a sharp contraction in the beverage industry in Argentina. The EBITDA drop in this segment more than offset the better results in the Chile and the Wine Operating segments.
Before moving into the analysis of the quarter, we would like to mention that from third quarter of this year we started consolidating “Aguas de Origen”, our water business in Argentina, of which we now hold 50.1% of the shares. The consolidation of this business, added in this quarter, 844,000 hectoliters to our consolidated volumes, and a loss in the quarter of CLP 1,052 million to our consolidated EBITDA. The explanations below in the paragraphs related to the consolidated and the International Business Operating segment results, consider organic figures, this is excluding the consolidation of Aguas de Origen.
During the third quarter of this year, organic revenues contracted 6.9%, explained by a 5.5% contraction in organic volumes and 1.5% decrease in organic average prices in Chilean peso. The decrease in organic volumes was mainly due to the weakened demand in Argentina. Lower organic average prices in Chilean pesos were fully explained by Argentina, partially compensated by revenue management efforts.
Gross profit was down 13.7%, and as a percentage of net sales deteriorated 342 basis points organically, due to higher cost pressures, mainly coming from the depreciation of the Chilean peso and the Argentine peso against the U.S. dollar, impacting our U.S. dollar-denominated costs.
Organic MSD&A expenses contracted 10%, and as a percentage of net sales improved 130 basis points organically, due to efficiencies across all operating segments. In all, organic EBITDA reached CLP 71,483 million, a 17.2% decrease, and organic EBITDA margin contracted 140 basis points. Consolidated net income reached a gain of CLP 29,548 million, increasing 211.1%, driven by a better non-operating result, particularly in Argentina.
In the Chile Operating segment, top line expanded 7%, as a result of 5.2% increase in average prices and 1.8% higher volumes. Average prices were boosted by revenue management efforts while volumes expanded, changing the trend of the first half of the year. Gross profit was up 2.8% and as a percentage of net sales decreased from 44.8% to 43%, as a result of higher cost pressures, largely coming from our U.S. dollar-denominated costs. On the other hand, we very proud of -- that our MSD&A expenses decreased 1.7% and as a percentage of net sales improved 302 basis points, due to efficiencies, which more than offset higher U.S.-denominated expenses, such as for example energy costs. In all, we presenting a turnaround in terms of EBITDA, as EBITDA totalized CLP 59,880 million, a 13.8% rise and EBITDA margin grew 84 basis points.
In the International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, organic net sales recorded a 33.3% decrease, as a consequence of a 23.5% contraction in organic volumes and 12.8% lower organic average prices in Chilean pesos. Weaker organic volumes were mostly explained by Argentina due to a difficult context for consumption, although we wanted to say that we are starting to see a sequential improvement.
Lower organic average prices in Chilean pesos were driven by negative translation effects in Argentina, as prices in local currency grew. The latter was partially compensated by revenue management efforts and positive mix effects in all the other countries. Organic gross margin deteriorated 598 basis points, as a result of cost pressures, mostly coming from the sharp depreciation of the Argentine peso against the U.S. dollar and its impact in the already mentioned U.S. dollar-denominated costs. Organic MSD&A expenses decreased 26.5%, and as a percentage of net sales deteriorated 446 basis points, mainly due to the lower scale in Argentina. Organic EBITDA reached CLP 5,006 million, an organic drop of 80.6%.
We would like to highlight that during this month in October, in Paraguay, we continued expanding our regional scale by entering into an association with Vierci Group, regarding the PepsiCo license for the production and distribution of beverages as well as the distribution of snacks in this country. Consequently, Paraguay becomes the second country where the PepsiCo license is part of CCU brand portfolio, in addition to Chile. The Vierci Group, with 57 years of experience in various sectors, has its quarters in Paraguay developing its activities in Paraguay, Brazil, Chile, Bolivia, Peru, Panama, Uruguay and the United States.
Finally, the Wine Operating segment posted a top line expansion of 3.3%, driven by 1.9% higher volumes and 1.4% rise in prices. Volumes were boosted by the Chile domestic market, which grew 6.5%, while exports from Chile contracted 1.2%, due to logistic difficulties in September which caused shipment delays. The better average prices were explained by the weaker Chilean peso and its favorable impact on export revenues, partially offset by negative mix effects. Gross profit rose 1.6% and gross margin decreased 66 basis points. MSD&A expenses were flat, and as a percentage of net sales decreased 102 basis points due to efficiencies. In all, EBITDA reached CLP 12,521 million, a 7.9% growth and EBITDA margin expanded 71 basis points.
Regarding our main JV and associated business in Colombia, volume increased high single digit, driving better financial results. The later allow us to record a positive EBITDA on an accumulated basis as of September 2024.
Now I...
[Technical Difficulty]
[Operator Instructions] The first question comes from Mr. Álvaro García from BTG Pactual.
My first question is on the licensing agreement in Paraguay with Pepsi. I was wondering if you could maybe give a little bit more color how it might compare to Chile's agreement, the snacks element? Is it a 50-50 JV? Is it just a distribution agreement? Any sort of color would be greatly appreciated there.
What is your name? I didn't hear your name.
It's Álvaro García, BTG Pactual.
Yes, it's a long-term license agreement with Pepsi that has the company. The new company, we'll consolidate, thus we'll control the company in Paraguay. And it would add practically 30% to 40% more EBITDA to the business. Of course, we receive the PepsiCo portfolio with a strong brand and international brand in colas, also Gatorade. And at the same time, we will be doing the distribution of snacks. So it will add, let's say, a very important scale to our business in Paraguay, okay? Of course, we will have synergies in sales and logistics, and we have a plan to implement this in the following, let's say, 6 to 9 months.
As we said, these are first-class partners with operations in several countries with a long legacy in doing business in Paraguay, the Vierci Group. And we are glad that this is the second PepsiCo license that we have in the region, along with Chile. And of course, we will add to the business all our experience in managing the multi-category portfolio and especially Pepsi brands. As you know, we have been several times selected as Pepsi bottler of the year.
Is someone with micro open, Álvaro. It's you, Álvaro, okay. So that's the color I can give you so far, Álvaro.
Next question comes from Mr. Felipe Ucros from Scotiabank.
So a couple of questions. I was surprised that you managed -- that you mentioned that there were some expenses in dollars in the Chile operation. Just wondering if you could give us some detail about what those are and kind of the magnitude just so we can think about this whenever there's devaluation or revaluation, it would help us in our model.
And then the second question which is a little more strategic. You talked about the logistic difficulties in wine exports in your Wine division. Just wondering if you can talk about what the details are on those. I know we've had these before in the last 3 years. We thought they had gone away. And then probably more importantly, should we expect kind of a catch-up for this in the coming quarters as you kind of cover the hole that was caused in September?
Thank you, Felipe. Nice to hear about you. So let me touch Chile. I have done some work and read you report or some reports. So we are very satisfied about the performance in Chile in the third quarter because we grew our EBITDA double digit after a very tough quarter 2 as we talk. And with positive -- we posted positive volume, 1.8%.
And I would like to highlight that in terms of comps, we didn't have an easy comp from quarter 3 because some of you has posted that quarter 3 decreased minus 5% compared to quarter 3 2022. But I would remind you that in '22, we still had some effect or some carryover in terms of per capita consumption due to the pension funds withdraw.
So comparing quarter 3 '23 against the same quarter of '22 was a little bit misleading. So comps were not easy. And despite that, we grew our volumes 1.8% while increasing prices 5.2%. In 2 years, the total price increase for the operating segment is up to 15%, which is our strategy to recover profitability, as you pointed out. As a consequence, we grew gross profit 2.8%, which is good and a very good expense control at the level of MSD&A. So the quarter was -- and all of this maintaining our market share. And this EBITDA growth, managing external effect up to CLP 11 billion, so which is significant, CLP 11 billion, let's say, or CLP 11,000 million of -- especially due to FX, to exchange rate.
So going forward, of course, now we can say in quarter 4, we will have an easy comp regarding quarter 4 of last year because of weather condition, because seasonally adjusted, the decrease of quarter 4 of last year compared to a normal quarter 3 was 10%. So we will have a significant upside in terms of looking at the comps, and it's a very high quarter. So we are positive on the results of Chile in the quarter 3, and I wanted to highlight and thank you for your question.
Regarding your second question, yes, absolutely, we will catch up. Sea freight, transportation depends, I don't know what happened in the Red Sea, what happened with international trade, it occurred this in September, but certainly with a catch-up now in October of this, we will not lose the sales. As you know, export manage, let's say, levels of inventories that consider this kind of contingencies. We are not talking about the prices we had during the pandemic or right after the pandemic regarding sea freight, Felipe.
That's very clear. And maybe if I can do a follow-up. You talked about the price increase in Chile. It seems or what we've heard is that your competition has also moved with you guys. So it seems like the price increase was sustainable. I know that hasn't been the case the last couple of years. So just wondering if you could tell us what changed and what you're seeing on the competitive environment in Chile?
Chile is a very competitive market. We have discussed this several times. It's a competitive market. It's an open market. So at the end, everybody is subject to the external effects in terms of currency and in terms of raw materials. Every brewer in the world in the last -- since 2019 has lost EBITDA margin, but especially in the line of gross margin because of input cost. Input costs are there. Although we have seen, let's say, some improvement in terms of cost or lower cost in sugar and PET, aluminum still is high. So in that sense, in order to recover profitability, revenue management efforts are key, while -- and this is part of the HerCCUles plan, preserving our scale, let's say. And this, we have been successful in Chile as we grew our volumes 1.8%. I already explained, I hope this was clear for you, the comps statement, but I'm maintaining market share. So this was an ideal quarter in our view.
Our next question comes from Mr. Santiago Bringas from HSBC.
This is Santiago Bringas for Carlos Laboy from HSBC. Could you give us more color regarding what's happening in the premium beer segment in Chile? Just expand on how the category as a whole is growing.
They unmuted. They put me mute, but now I'm unmuted. Can you hear me, Santiago?
Yes. Yes, I can hear you.
Yes. We grew 1.8%, and in the whole geography, if I include domestic wine, 1.9%. And the growth of nonalcoholic product and alcoholic product was similar, let's say. So even we grew a little bit more in alcoholic products compared to nonalcoholic. But overall, it was similar, let's say, in this range of 1.8%. And if I include domestic wine, 1.9%.
Our next question comes from Constanza Muñoz from Quest Capital.
I have a question in relation with Argentina. Could you give us more color about the consumption situation there in this quarter? And what are you expecting for the next year?
So Argentina, Argentina, as we mentioned, we have seen a sequential improvement in quarter 3, not -- let's say, still decreasing the volumes. We decreased the volume against last year, something like 25%. However, I would like that this sequential improvement accelerate in October. In October, we saw a real -- a much better sequential improvement. Seasonally adjusted, the volumes grew in Argentina in October against the trend we have in quarter 3 by 7%. This is seasonally adjusted, which is good because at the end, we have still lower volume than last year, but a much lower decrease. And as a consequence, we are seeing better results in terms of financial results. Because if you saw the International business, although we had, let's say, positive EBITDA in the quarter, it is this consolidated International business, in Argentina, we also had a positive EBITDA, but much lower than last year for obvious reason that we have been talking along the year.
So to give you more color, we are seeing more positive news now in October. We saw, let's say, moderate positive news in quarter 3 and now the starting of the quarter, still we are -- subject sales to weather sometimes or things like that, we are starting -- we are seeing an acceleration of this improvement in Argentina. Of course, in Argentina, you must be cautious, especially because the macro conditions. However, this improvement in quarter 3 and what we are seeing in the first month of quarter 4, these are positive news.
Our next question comes from Ms. Juliana Ohara from Goldman Sachs.
This is Thiago from Goldman. I have 2. And just to make sure we're talking like-for-like on the same thing, right? I know you commented about flattish market share in beer. Just to confirm if you could give us more detail sequentially on how your market share for beer and for NAB performed in Chile? This is the first question.
And the second one is regarding pricing, right? You did a very good job in revenue management year-to-date, but still your average ticket is growing a bit below your cost inflation, right? With the information and the vision, visibility you have so far in the state of domestic consumption in Chile, would you say there is more room for pushing prices a bit higher over the next few quarters?
We are a multi-category, multi-beverage company. So the number we posted in our -- annually in our Investor Relations is related to the total market share of the beverage industry in Chile, including beer, nonalcoholic. And this is completely stable, let's say, at 45%. We published last year 45%. So far, it's 45%. So overall, maintaining market share. We measure market share every week in supermarkets. We measure market share every month in the whole market in Chile and some categories by monthly, and we use for that Nielsen, which is we pay for that, let's say, and we pay to have the data.
We have ups and downs in the categories. You asked specifically about beer. We don't publish the market share of beer, but what I can say within a range, it's stable compared to last year. We -- as I said, we have ups and downs. We have a higher one in quarter 2, a lower one in quarter 3, but within -- what I would say, within plus/minus 1 point. It depends on the price dynamics, on the price increases in competition, but nothing to worry about that. And in nonalcoholic beverages, we have also a stable market share, I would say, completely in the last 3 quarters, if I saw, and compared to last year, let's say, within the margin, let's say, stable, completely stable.
[Operator Instructions] In the meantime, we will take a text question from Mr. Vicuña from CHL Capital. The question goes, how does CCU assess the current state of isotonic and hydration beverage market? Additionally, how does the growth of brands like Sioux affect competition? And what impact does it have on the product Gatorade? Finally, how do you perceive consumption behavior in this segment in the near future?
Yes. Thank you for the questions. It's regarding the question about sport drinks, sport drinks or isotonic, let's say, Gatorade. Yes, first of all, I would like to highlight that the sport drink per capita consumption in 2012 was 1.3 liters per capita. And nowadays, we are talking about something around 6 liters per capita. So it's significant. This is in Chile. The question was related to Chile, I think. So it's a significant increase in terms of per capita consumption, which is very good. More people also is -- it means a healthy behavior, let's say, aligned with CCU goals or mission for a better life. Let's say, more people running, more people playing soccer or stretching or going, okay, so it's in the healthy side of the life, so which is good.
And we have been the market leader in this -- especially in this category along all this time. Of course, it's very competitive, especially against the Coca-Cola system, also is a category where you need to activate a lot events. We have -- we support many soccer teams with Gatorade. We support the Santiago Marathon, which is an event of 30,000 people running in Santiago and also The Pan American Games last year. So at the end, it's a very exciting category. We will continue to develop this with new innovation, especially electrolyte variants of Gatorade and Sioux and new packaging and flavors and the zero Gatorade, zero sugar Gatorade proposal. So it's a very exciting category and growing category, as I said.
We have a follow-up text question from Ms. Dominga Aguilera from MBI Inversiones. I would like to know if you could share with us what are you expecting for the prices of raw materials for next year, sugar, PET, aluminum?
You came to a difficult day because I think all the predictions maybe we had last week maybe will be changing after the events in the U.S. on Tuesday to Wednesday. So first of all, we have some uncertainty and volatility in the exchange rate, which at the end is one of the main drivers of the commodity prices. But let's put aside the exchange rate, everybody can go to Bloomberg, what are the latest forecast of the U.S. dollar there.
Regarding PET prices, what I can say is, first of all, the international markets are flat, let's say, maybe some increase in freight costs because we import all...
[Audio Gap]