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Good day, and welcome to the CCU Second Quarter 2018 Results Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Isabel Darrigrandi, Head of Investor Relations. Please go ahead.
Thank you. Welcome, everyone, and thank you for attending CCU's Second Quarter 2018 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 2018 results. Felipe will review our overall performance, and we will then move on to a Q&A session.
Before we begin, please take note of our cautionary statement. Statements made in this call that relate to CCU's future performance and 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 their website.
It is now my pleasure to introduce Felipe Dubernet.
Thank you, Isabel, and thank you all for joining us. Hello, everyone. In the second quarter of 2018, CCU reported CLP 165,926 million in net income, which includes growth from both ongoing operations as well as onetime gain from the CCU Argentina and ABI transaction executed this quarter. The transaction primarily consisted in the transfer of a portfolio of brands and cash in exchange for the early termination of the Budweiser license in Argentina.
It is worth highlighting that CCU Argentina's volumes this quarter, including the new brands, continued to deliver double-digit growth in the 2 months following the close of the transaction, which demonstrates the strength of the CCU Argentina beer brand portfolio without Budweiser and with the new brands.
Excluding the onetime gain from the transaction, consolidated EBITDA grew 29.6% and net income grew 47%. Also, excluding the onetime gain from the transaction, consolidated EBITDA margin increased by 259 basis points from 12.9% to 15.4%, mainly due to greater economies of scale in our Chile and international operating segments and efficiencies from the ExCCelencia CCU program in all the operating segments.
The net impact of the transaction on CCU consolidated earnings was a onetime gain of CLP 153,496 million in net income. The result is explained by the pretax cash payment of USD 306 million and the valuation of $44 million of the brands received by CCU Argentina and other operating and nonoperating effects related to the transaction.
As previously reported, the transaction also includes pretax payments of $10 million for the production of Budweiser for the first year, and up to $28 million per year for up to 3 years, depending on the timing and volume of the transition to CCU Argentina of the production and/or commercialization of the brands Iguana, Norte, Báltica, as well as the licenses brands, Grolsch and Warsteiner.
In the Chile Operating segment, our top line grew 8.3%, driven by volumes that increased 9.2%, which was partially offset by 0.8% lower prices. The high-volume growth was due to favorable weather, positive consumer confidence and marketing initiatives, while with a slight increase our overall market churn. The lower average price this quarter was a result of product mix and temporary promotional activities. Gross margin improved by 132 basis points, primarily due to cost efficiencies from the ExCCelencia CCU program and the impact of the 6.6% appreciation of the Chilean peso against the U.S. dollar on our dollar-linked costs.
MSD&A expenses as a percentage of net sales decreased by 54 basis points, thanks to efficiencies from the ExCCelencia CCU program and dilution of fixed distribution expenses. As a result, EBITDA grew 16.2%, and the EBITDA margin expanded by 131 basis points from 18% to 19.3%.
In International Business Operating segment, which includes Argentina, Uruguay and Paraguay, we reported top line growth of 11.4%, driven by volumes that increased 29.3%. While all 3 countries continue to report volume growth, Argentina was, once again, the main driver, with sustained double-digit volume growth in each of the 3 months of the quarter.
The average price in Chilean pesos declined by 13.8%, explained by the 59.3% depreciation of the Argentine peso against the Chilean peso. Given that, prices in local currency increased in line with inflation. Our gross margins decreased by 333 basis points due to the impact of the 48.8% depreciation of the Argentine peso against the U.S. dollar on our U.S. dollar denominated cost as well as 18.1% increase in average aluminum prices in the quarter.
Our MSD&A as a percentage of net sales showed significant improvement, primarily due to efficiencies from the ExCCelencia CCU program and fixed expense dilution from increased volumes. Excluding the onetime gain from the transaction already mentioned, EBITDA showed a significant growth, and therefore, a margin expansion from 1.3% to 11.5%. Although we continue to see positive results from our convenience packaging and diversified brand strategy, we remain cautious regarding the macroeconomic outlook in Argentina. The Wine Operating segment reported top line growth of 1.8%, explained by 1% higher volumes and 0.7% higher average prices in Chilean peso. The average price in Chilean pesos continued to be pressured by the appreciation of the Chilean peso against the U.S. dollar, which impacted our export revenue. Gross margin decreased by 686 basis points from 39.8% to 33%, pressured by the 12.2% higher cost of sales per hectoliter, following the weak 2016 and 2017 harvest. The 2018 harvest yields returned to historical average levels. The operating segment reported a 27.1% decrease in EBITDA, with an EBITDA margin of 12.6%, a contraction of 499 basis points. In Colombia, where we have a joint venture with Postobón, our portfolio of international beer brands continue to win over new consumers. We are also making preparations for the introduction of our first mainstream national brand in Colombia, which we will launch once we have completed construction of our new brewery later this year and secure all the necessary permits.
Now I will be glad to answer any questions you may have.
[Operator Instructions] We'll take our first question.
This is Thiago Duarte with BTG. I have a couple of questions I'd like to focus, particularly in the international operating segment. First of all, it's clear that the results there have been improving for several quarters now. And I couldn't help but listen to your statement when you say that you are still cautious on the macroeconomic outlook in Argentina. So I just wanted to understand if you believe that the worsening macroeconomic in the country means that we should expect some deceleration of volumes and some more pressure on margins? Or it was just a regular cautious and conservative statement by your side? Or something like that? And the second question would be regarding the volume impact of the exchange of brands. So is there -- I understood initially that the amount of volumes contributing from the brand that you are receiving is similar to the volume that you're giving up by determination of the Budweiser agreement. So just wanted to understand that, when we look at the 29% volume growth in the International Business in the quarter, we are looking on an organic figure? Or is there some adjustment to be made in terms of the inorganic contribution from the brands that you guys acquired?
Hello, Thiago, and thank you for your 2 questions. The ones referring to the macroeconomic outlook for Argentina, and the second one regarding the performance of our beer portfolio in Argentina. As you noticed, we -- our International Business segment has presented robust volume and EBITDA growth in the last 6 quarters. Primary is correct, are saying -- primarily due to our operation in Argentina. During this period of time, we did not see a similar performance in other consumer-related sectors in the country. As the Argentinian economy has a double-digit inflation, another headwind during this time. As a result, we believe that the beer industry and CCU Argentina, in particular, has seen a growth trend that was not driven by macroeconomic factors. Over the last couple of years, CCU Argentina has innovated in terms of new types of beers adding new varieties through brand extensions, and therefore, the success of a brand like Imperial. CCU Argentina was also very innovative with packaging and its one-way convenience can packaging strategy, which has been very well received by the consumer. As a result of all these innovations, we boost industry growth. Also, Schneider, Imperial, Heineken, and Mueller, and our other brands in Argentina make up a very strong and diversified beer portfolio, which covered the full range of price point and consumer taste. That said, we recognize that the macroeconomic outlook for Argentina has deteriorated recently. I think, of course, you are aware about that. Consumer confidence also has declined, as the Argentine peso has depreciated sharply and interest rates and inflation rates are on the rise. With such a fragile macroeconomic environment, we think it is appropriate to remain cautious regarding how macroeconomic conditions will continue to evolve and in part, the consumer. Despite this, we feel very confident in our brand -- in our beer brand portfolio in Argentina after the transaction and [indiscernible] Budweiser. In fact, the consumer preference for our brands in Argentina continue to increase, demonstrated by the excellent performance of our brands after the transaction, especially with strategic brands, such as Schneider Imperial, Heineken and Mueller. And answering your specific question about organic growth, what I can inform you is that all of these brands delivered strong volume growth on a high comparison base of last year during the 2 months after the transaction. That is May and June. Of course, in April also, we experienced a very high growth. So, so far, the industry continue to grow. Our portfolio is strong. However, I must say there is a risk regarding the macroeconomic environment in Argentina. Okay, Thiago?
[Operator Instructions] We'll move on to our next question.
This is Luca Cipiccia from Goldman Sachs. I wanted to ask, maybe, if you can elaborate a bit more on the volume performance in Chile, which was very strong. I think you commented on promotional activity. You commented on the benefit of the weather. But maybe if you can segment a little bit more for us from -- by category or by channel? And looking ahead as well, what type of momentum you think you'll be able to maintain in the second half of the year.
Yes. Thank you, Luca, and good morning. Thank you, good morning in Boston. Yes. We have had a very strong quarter in terms of volume, as you noticed. Several factors influence our volume growth. First of all, so far, the economy has been showing positive signs, as reflected in the IMACEC, which was 4.9% in June, coming as you know from low economic growth in the past years. This quarter, we saw strong recovery in volume growth compared to the first quarter of this year, but remember when we saw a slight decline in first quarter, it was due to a high comparison base in Quarter 1 of 2017. In the second quarter, answering your question, all 3 categories grew beer, nonalcoholics, and spirits. For example, beer grew mid-single digit and nonalcoholic grew low double-digit. It was really a very good performance in the second quarter, with a slight overall market share gains and improvements, along with industry growth, boosted by favorable weather, as you noticed. We have higher maximum average temperatures, especially in May, and half of the rain as compared to second quarter of last year. So as you know, we don't do forecast -- future forecast. So if you take the first semester, our volume grew 2.6% based on a very big quarter in the quarter 1, when we show practically flat volumes because of the high promise of last year. Therefore, in our view, in my view, as long as the economy continues to improve, we can see higher volumes. However, probably not at the level of the second quarter, Luca.
Perfect. Clear. Maybe just, I think, Andina, they had volumes growing 6% or so and they commented themselves on a market share loss of about 100 basis points, which I will assume from what you say, they largely moved to your portfolio. Maybe if there's any comment there on the sort of market share dynamics? How sustainable temporarily it may be? Maybe timing of promotional? Is there any other factor that you see has got -- brought some benefit to your business in terms of gaining share -- market share on a sustainable basis?
Yes. As you know, our overall markets challenge in nonalcoholic has been improved in the last year. And this was due to our very strong position in the non-CSB portfolio, in categories such as water, flavored water, enhanced water, functional drinks, sport drinks, iced tea, juices and mixes. As you know, we have a very strong position, and these are the categories that in the past and continue to grow at a faster rate than CSB. So naturally, we increase our market shares due to that. Chile is a very competitive market and in any given quarter in a specific category, you can lose or you can gain share depending on the promotional activity or depending on the reaction of your competition. So what I would say is that the trend in nonalcoholics continue to grow, and especially in the categories where we have a more clear and stronger leadership position.
[Operator Instructions] And it appears we have no further questions in the queue. I would like to turn the conference back over to our speakers for any concluding remarks.
Thank you all for attending this teleconference. In summary, this quarter's earnings reflects both the aggressive transaction in Argentina as well as continued growth and efficiencies in our ongoing operations.
Over the second half of 2018, CCU will continue to implement our sustainable and profitable growth strategy, supported by our strong portfolio of brands, the ExCCelencia CCU program, regional and multi-category synergies and focus on innovation, marketing and sales execution. Have a wonderful end of the day and an excellent weekend.
And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.