Compania Cervecerias Unidas SA
SGO:CCU
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Good day and welcome to the CCU Q4 2017 Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Nicolás Novoa, Financial Planning and Investor Relations Manager. Please go ahead.
Welcome everyone and thank you for attending CCU's fourth quarter 2017 conference call. Today with me are Felipe Dubernet, Chief Financial Officer, and Carolina Burgos, Investor Relations, Senior Analyst.
You have received a copy of the company's consolidated fourth quarter 2017 results. Felipe will review our overall performance and we will then move on to Q&A.
Before we begin, please take note of our cautionary statements. 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 web page.
It is now my pleasure to introduce Felipe Dubernet.
Thank you, Nicolás, and thank you all for joining us. We are pleased to present strong performance for the fourth quarter of 2017 showing an EBITDA growth of 11.5% compared to the same quarter last year. Our top line increased 6.3% as a result of 2.5% consolidated volume growth and 3.7% higher prices in Chilean pesos terms. The consolidated gross margin improved 52 basis points from 53.8% to 54.3% due to our revenue management efforts and manufacturing cost efficiencies, which were partially offset by the higher cost of wine and by the unfavorable exchange rate effect due to the devaluation of the Argentine peso. Only our EBITDA margin improved 109 basis points from 22% to 23%. This end 2017 with a consolidated volume of 26 million hectoliters, together with an EBITDA growth of 15.1%, and an EBITDA margin improvement of 103 basis points from 18.2% to 19.3%.
Net Income reached CLP 129,607 million, an increase of 9.4% compared to last year. In the Chile operating segment, our top line grew 3.4%, driven by the 5.7% higher average prices, which offset the 2.1% decrease in volume. This volume decrease is the result of high comps with a slight decrease in market churn in the nonalcoholic category. Our gross margin improved 268 basis points due to strong revenue management efforts, along with the 4.9% appreciation of the Chilean peso against the dollar, reducing our U.S. dollar denominated cost base, and additional efficiencies in production. All-in, we experienced an EBITDA growth of 13.1%, and an EBITDA margin improvement of 232 basis points from 25% to 27.3%.
In the International Business Operating segment, which consists of the operations in Argentina, Uruguay and Paraguay, we reported top line growth of 17.8%, driven by 15.2% higher volumes. Volume growth was driven mainly by growth of the beer industry in Argentina, while maintaining a stable market share compared to the previous quarter. Our Gross margin was relatively stable at 59.6%, following our revenue management efforts, together with efficiencies and volume growth scale effects on fixed manufacturing cost offset by the 13.3% devaluation of the [ peso ] against the dollar. Further efficiency gains have enabled us to achieve 237 basis points improvement in our MSD&A as percentage of net sales. All-in, our EBITDA grew 33.5% with an EBITDA margin improvement of 239 basis points from 17.9% to 20.3%.The wine operating segment reported a top line decrease of 1.6%, as the 3.5% higher volume growth were offset by 5% lower average prices in Chilean peso terms, due to the 4.9% appreciation of the Chilean peso against the dollar, affecting our export revenues. The lower average prices, together with the 7.6% higher cost of sales per hectoliter, following 2 consecutive weak harvest leading to a higher cost of wine, have resulted in a 756 basis point gross margin contraction. All-in, our EBITDA decreased 45.6%, an EBITDA margin contraction of 891 basis points. CCU has demonstrated its long-term commitment to the wine business by increasing its stake in Viña San Pedro Tarapacá through a tender offer, which was finalized by the end of January 2018 and allowed us to increase our stake from 67.22% to 83.01%. In Colombia, where we operate through our joint venture with Postobón, we are planning to have our 3 million hectoliter plant ready for production during 2018. With the opening of the plant, we will launch a mainstream beer brand and a malt-based beverage for the Colombian market, which will complement the current portfolio of imported premium brands that have reached a volume of 0.4 million hectoliters in 2017.Now, I will be glad to answer any questions you may have.
[Operator Instructions] And we'll go first to --
Good morning, this is Luca from Goldman Sachs. Good morning, thanks for taking my question, I was hoping maybe you could talk a little bit more about the 2018 outlook, especially for profitability. I think 2017, I think both in Chile and Argentina have been overall, I think have been a positive year, where you sort of deliver fairly consistent margin improvement, some was self-help some was -- some of the [ extended variables ] that's got to be better. I guess my question relates to how much more can you see, you can do with the type of visibility that you have today in Chile. And I think as more importantly in the international business in Argentina, in particular, there is still quite a significant gap between your gross profitability and your operating profitability. Maybe explain how that could change as the market recovers. But maybe can you also remind us why the EBITDA margin is still so low in Argentina, considering that the gross profitability is fairly comparable or where one would expect it to be given the business, the market share that you have there. So that would be my question, I guess split in two.
Hello Luca. Thank you for your questions. I think there is several questions in one question. So first -- the 2018 outlook, overall -- first of all, we don't make future projections. So what we have seen is certain recoveries of the economies, some numbers in the Chilean economy from January that were published yesterday, they are a little bit encouraging in terms of [indiscernible]. Another thing that is helping especially with Chile, but not the wine segment is the exchange rate, but in overall, it would have a positive effect in our result and lower exchange rate in Chile. So I will be cautious in terms of volume growth still, because these are only early sign of having a better economy or a better GDP growth in Chile. I will still be cautious on that. Other markets, international business, the Argentine economy recovery in 2017, we experienced an extremely good industry growth in Argentina, that boosted our volumes in 2017 significantly. So it would be difficult in order to make a projection if this will continue or not. What concern me a little bit in Argentina is a higher exchange rate with Argentine peso reaching ARS 20, so ARS 20 per U.S. dollar. So this certainly affects our cost -- or our cost base.
In terms of other inputs such as commodity, I think I am worried about the aluminum prices that are above [ ARS 2,000 ]. Regarding the EBITDA margin in Argentina, we have seen a significant recovery during 2017, increasing the international business segment moving in the full year the margin from something like 9% to more than 13% EBITDA margin. And remember in Argentina we are #2, so we have disadvantages in terms of distribution and in terms of the scale. However, with a more stable macro I think these margins should improve as well as our gains in terms of a scale that we have experienced in the last year. So that's the reason why we have lower margins in international segment.
Can you just clarify on the Argentina EBITDA margin and the distribution model? Can you remind us how you actually -- you operate?
Yes, it's in our investor relation presentation. So there is a part that we serve directly and that's part of supermarkets that accounts for 20% of the sales and direct sales is a small portion. The rest is through distributors in Argentina.
Is that the Coca-Cola system or a range or number, can you just --?
No, we distribute about 20% of our volumes through the Coca-Cola system, but with Arica and Andina, Arica in the north and Andina in the south. The rest of -- the other part of the country it's through distributors. We are quickly gaining, as you noticed in our results these efficiency gains but also scale gains due to the volume growth. And remember Argentina has suffered a price high inflation, high devaluation. So our ability to compensate inflation in our P&L through revenue management of efficiencies is key in order to increase our EBITDA margin.
This business structure direct relative to the third party, is that sort of a legacy of where Argentina has been in the last 2 years? Is there any discussion or any rumor or any consideration whether this is the right model where as you move forward you could do more direct distribution? Is there anything that could change there?
Always we see the opportunities in evaluating our go to market strategy.
And we'll go next to --
Can you hear me?
Yes, of course. Please tell me your name.
Fernando Olvera from Merrill Lynch. My questions are, the first one is regarding the wine business. I was wondering if you can share with us your cost outlook for this year. And my second question is in Chile, can you comment about competition and how do you expect volume to behave in 2018 by categories between alcoholic and non-alcoholic and what will be your pricing strategy?
Thank you Fernando for your question. Regarding the wine business, the wine is a cyclical business linked to agriculture -- to agriculture condition, especially for the farmers. We face a very -- last 2 years were very abnormal with 2 very weak harvest that increased significantly our grape and wine cost. So -- and this damaged our P&L. This will continue to last in 2018 because we have inventory of wine priced at higher level. Next harvest is -- we are in the door of this year harvest starting now in March. But we expect a normal harvest. But until you don't finish the harvest, you never know. So we have had in the last 2 years significant impact in our P&L due to extremely high cost of wine. The commercial in 2017 was quite good, especially in the domestic market with good growth and with good volume growth in the export market. However our ability to increase prices in export market is more difficult. That's for the wine business. So you ask me for an outlook and I will refer to the answer I gave to Luca. We are a consumption [indiscernible] consumer confidence. So if the Chilean economy starts to rebound or to accelerate we could expect a better volume growth. And of course in our strategy and that has been very clear once we have started the ExCCelencia CCU program, we continue to do revenue management efforts and working a lot in our portfolio in order to have a more profitable SKUs, let's say.
We will go next to --
It's José Yordán at Deutsche Bank. Can you talk to me about this excise tax increase in Argentina? I am little worried that because they didn't raise the excise tax on wine that it's going to put the beer category at a disadvantage. So when exactly do you expect to pass the new taxes to prices and what kind of impact are you kind of embracing for here?
Thank you, José for your question. Yes, you are right there is a tax reform in Argentina. Among changes in corporate taxes Congress also approved an increase in excise tax for beer while maintaining no tax for wine. I agree with you this is a disadvantage for the beer industry and also for the agriculture in Argentina that is very intensive in barley production. So this is clearly a disadvantage. Excise tax will increase from 8% to 14%. So our aim always will be to protect our P&L in order not to have an impact due to this excise tax impact. In other markets, we suffered the same as you know, but it was -- in other market it's all the alcohol portfolio together that has increased excise taxes. That's the case of Chile in 2014. It's very difficult to predict. how will that -- will affect the consumption in Argentina. I will be honest, we have seen a very positive market trend in terms of industry growth in Argentina. That was due to several factors. Among other factors was weather at some point, price -- relative price between different products -- non-alcoholic products such as wine and beer and more than it a consumer confidence for a economic growth in 2017 in Argentina. But I would say that the market is also changing in Argentina towards more convenient packages. And we will continue to develop our proposal on that as well as in terms of our full brand portfolio.
So just to clarify this. This has already gone into effect or is there a lag between the [indiscernible] effect?
The information I have is that is entering into effect today in the 1st of March. This is the information I have.
And we will go next to...
This is Mariana Hernandes from Credit Suisse. I was wondering if you could explore more the topic on Argentina. Do you think that this beer industry growth is mainly due to beer gaining share of [ store ] over wine or what is the reason that you see behind it. And if you could give us more details about your growth on premium versus mainstream beer in Argentina. Are you gaining share or any specific price segment, any details would be welcome? Thank you.
As I talk to [ Corse ] there were several factors. We experienced weather factor for example in quarter 4, we had a extremely hot October compared to last year, so that, and also a very softer winter. So weather was a factor. Another factor you are right, we saw a [ gap price ] between wine and beer, and that's also may have an influence. The another factor was linked to market development as I was mentioning to [ Corse ]. So the one-way packaging is gaining importance in Argentina. So more consumers are bringing home beer to have beer at home and not only in the on-premise channel. So that is another reason why we think is more structural reason in order to see these enhanced per capita consumption in Argentina. Regarding premium, premium continue to grow but this growth is also in the mainstream linked to the convenience offer -- of the offering in the market. The premium is growing and we are very satisfied by the performance of Imperial, which is a very good proposal to the consumer and also Heineken in Argentina. The rest of the portfolio mainstream is also growing and have an excellent performance. I think this are the -- I have already answered your question, I think with this. Regarding market share. Yes. We published our market share for our operating segment and we made some moderate gains of market shares in international business segment and also in Argentina.
[Operator Instructions]
And will go next to...
Hi, it's Thiago Duarte with BTG. Thank you for taking my question. I have 2 questions actually. First one is back to Chile. I appreciate your comments on the volume performance and you mentioned that you -- you lost a little bit of market share in the nonalcoholic segment. I was wondering how you compare in the alcoholic segment, particularly in the beer segment, how you saw the industry and your performance in this particular quarter and how you saw the competitive environment in this particular quarter and going forward, that would be interesting to hear.
And the second question would be related to Columbia, again I appreciate the comments and the details that you guys provided us with in your release, but it would be nice to hear little bit more. I don't know how much you guys are in a position to share with us in terms of the expectations for the ramp-up of the facility that you're going to be starting this year. And if you could, a little bit more detail on the profitability of the important premium brands that you have already, that you have been importing already into Colombia, as you mentioned 0.4 million hectoliters, it will be interesting to see how you guys see the profitability of that incremental volume kicking in from Colombia, that will be nice. Thank you.
Thiago. Thank you for your question. First of all, I was wondering you ask about Beer Chile. So in terms of Beer Chile it was -- quarter 4 marker share was very stable compared to previous quarter. And also compared to quarter 4. So overall in the full year, I would say, we maintain market share in beer in Chile. Volume growth was more moderate. But it was not below our forecast. And your question regarding Colombia. In the case of Colombia, as we said, the new plant, we are very pleasing for the results so far, reaching 0.4 million hectoliters of imported beer, that we distribute to the [ customer ] network. We grew 60% our volumes and in addition to this imported premium portfolio, we add a craft beer with the addition of [indiscernible] to our portfolio, which we see a lot of potential. As we stated, we are building our brewery in the Bogota region and will be ready for production during 2018. You asked for more specific details on terms of ramp-up. We are working in the final timeline. So once finished, probably we will comment on a more precise ramp-up.
Thank you. That's helpful. And just to clarify, just to make sure I understood. When you mentioned the beer category in Chile. You said there was a moderate growth in the fourth quarter. That's correct.
Yes, that's correct.
Thank you, we will go next to...
Hi, this is Mohammed Ahmad from Foyston, Gordon & Payne. Thank you very much for taking my question. My question. I have 2, one is just could you give us some color on what like-for-like beer pricing in Chile is like right now or was in Q4.
And then on the EBITDA margin in Chile, in aggregate for last year, is that sort of representative of the kind of year, we will see in '18, again not in forecast with regards to the margins in Chile, but more like was there anything one-off about the kind of business mix, you had in '17, that would not repeat in '18, otherwise we can use '17 as a base for '18, I guess.
Yes, let me -- in terms of -- let me clarify the previous question. In terms of beer in Chile, we saw overall a moderate volume growth in throughout the year, and we continue to make efforts in terms of revenue management and our aim is to continue to do so. I will answer your question about pricing. Regarding EBITDA margin. Yes. We experienced a recovery in 2017, a significant recovery in Chile of our EBITDA margins, and this was not only through revenue management but also through our mix and also through efficiencies. The strategy continue to be the same in 2018. But we need to see how this will be the evolution in terms of other variables such as exchange rate that seems to be positive for 2018, a competition on pricing, we need to -- is difficult to make a projection. But we will continue with our efforts.
[Operator Instructions] There are no further questions in the queue at this time. I'll turn it back over to you for any additional or closing remarks.
Okay, thank you for attending this conference call. The excellent results of the full year 2017 demonstrate our ability to realize profitable growth under difficult macroeconomic condition and an intense competitive environment where we were able to increase our market share in all our operating segments. We will build on this positive momentum to fight upcoming challenges and opportunities in our different markets, focusing on brand preference along with additional revenue management, and efficiency efforts, in order to secure a sustainable long-term growth path. Thank you, everybody, and have a nice day.
That does conclude today's conference. Thank you for your participation.