Compania Cervecerias Unidas SA
SGO:CCU
Earnings Call Analysis
Q3-2023 Analysis
Compania Cervecerias Unidas SA
The company has maneuvered through rough economic waters to improve its financial results and profitability in the third quarter of 2023. It achieved a 27.7% increase in consolidated EBITDA, while EBITDA margin improved by 269 basis points. Despite a challenging environment with economic slowdown and volatility in exchange rates and commodity prices, CCU was able to boost gross profit by 8.9%, primarily through price increases which compensated for a 5.1% decline in volumes.
The cash generation capabilities of the company remain robust. Net cash inflow from operating activities soared, transforming from a negative inflow last year to CLP 205,681 million. Investment outflows also declined notably, showing a prudent approach to capital management during turbulent times.
Performance varied across CCU's business segments. In Chile, net sales rose by 5.1% despite a 4.7% volume decrease, owing to a 10.2% surge in average prices. The International Business segment, however, faced a 2.4% net sales decline with volumes dropping 4.3% in the face of a weaker Argentine market—still, EBITDA for this segment impressively jumped 30.2%. The Wine segment was less fortunate, with revenues dropping 4.7% due to a significant 17.3% plunge in export volumes, though they managed to improve gross margin by 296 basis points.
The company is sharpening its product portfolio, trimming it by about 5% to concentrate on high-margin and high-volume SKUs. The strategy also involves disciplined innovation to enhance brand equity and margins. Despite headwinds like lower temperatures and a deceleration in economic growth, the company has held its ground in consumption levels, even outpacing GDP growth over the past four years.
CCU's nonalcoholic segment is under pressure from rising commodity prices, especially for sugar and orange juice, demanding significant price increases beyond inflation to maintain profitability. The beer business, more linked to the U.S. dollar, enjoys better margins. In Argentina, the integration of the Danone water business is set to improve scale and strengthen the P&L, providing a smoother ride through Argentina's challenging economic landscape.
In Colombia, there was a slight downtick in market share but recent recoveries and margin improvements suggest resilience, while in the wine segment there's a sense of optimism as destocking pressures may ease, signified by the recent growth in export volumes and renewed focus on brand preference and distributor relationships.
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Good day, everyone, and welcome to CCU's Third Quarter 2023 Earnings Conference Call on the 9th of November. Today's conference call is being recorded. At this time, I would like to turn the conference 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 2023 Conference Call. Today with me is Mr. Felipe Dubernet, Chief Financial Officer. You have received a copy of the company's consolidated third quarter 2023 results. Felipe will now review our overall performance, and we will then move on to a Q&A session. Before we begin, as usual, 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 the 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 our 20-F Form 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. Felipe Dubernet.
Thank you, Claudio, and thank you to you all for joining us today. During the third quarter 2023, CCU continued making progress to recover financial results and profitability in a challenging and volatile economic environment, the latter is shown at the operational level, increasing consolidated EBITDA by 27.7% and improving 269 basis points EBITDA margin.
The performance of the quarter shows that the path to improve our profitability under the original plan HerCCUles is moving forward. However, stronger efforts are needed in the context of economic deceleration and volatility in exchange rates and commodity prices. This drives us to focus on the pillars of HerCCUles. First, maintain business scale, strengthening revenue management efforts, deliver efficiency gains through our transformation program, optimizing CapEx and working capital, focusing on core brands and high-volume margins and innovations and continue investing in our brand equity.
In quarter 3, 2023, our revenues expanded 0.4%, explained by 5.1% decrease in volumes, more than offset by a 5.7% expansion in average prices in Chilean pesos. Lower volumes were caused by weaker consumption in Chile and Argentina and worst weather, especially in Chile while holding market share and a contraction in wine exports. The higher average prices in Chilean pesos were a consequence of revenue management efforts across all our operating segments. Gross profit [ jumped at ] 8.9% and gross margin rose 362 basis points, the latter explained by the higher average prices and flat average cost of goods sold versus last year.
The MSD&A expenses increased 2.9% and as a percentage of net sales grew 94 basis points, mainly as a consequence of higher marketing activities, the latter to keep enhancing brand equity. In all, EBITDA reached CLP 86,344 million, up by 27.7%. Net income dropped 44.9%, totalizing a gain of CLP 9,499 million. [Audio Gap] during the quarter. And second, CLP 8,665 million of nonrecurring expenses related with the route -- with the integration of the route to market of our JV in Argentina with our Danone into our beer and cider operation.
In terms of cash generation, we delivered another robust quarter. Thus, as of September 2023, net cash inflow from operating activities totalized CLP 205,681 million versus a negative cash inflow of CLP 21,871 million. In 2022, while net cash outflow from investment activities reached CLP 111,051 million, decreasing from the CLP 175,168 million during the same period in 2022.
In addition, we have decreased our portfolio complexity and recorded strong brand equity indicators being key to hold market share in our main categories. In the Chile Operating segment, our top line expanded 5.1%, explained by 4.7% decrease in volumes being more than offset by 10.2% growth in average prices. The higher average prices were explained by a robust revenue management initiatives that we have taken from end of last year. Lower volumes were explained by a challenging consumption environment, along with unfavorable weather, although in line with the industry as market share remains stable.
Gross profit expanded 17.4% due to top line performance and lower cost pressures. MSD&A expenses were 12.3% higher, and as a percentage of net sales grew 237 basis points, mostly due to higher marketing activities. In all, EBITDA reached CLP 52,618 million, growing 38.7% and EBITDA margin increased 320 basis points. In International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales recorded 2.4% contraction in Chilean pesos as a result of 4.3% drop in volumes, partially offset by 2% increase in average prices in Chilean pesos.
Volumes were negatively impacted by weaker consumption environment in Argentina, partially compensated by volume expansion in all the other geographies. Gross profit expanded 1.1%. MSD&A expenses decreased 6% and as a percent of net sales improved 167 basis points due to efficiencies, compensating high inflation and other cost pressures, especially in Argentina.
Altogether, EBITDA reached CLP 25,785 million, a 30.2% expansion from last year. The Wine Operating segment continued facing a tough business environment during the quarter. Revenues were down 4.7%, mostly explained by a 17.3% contraction in volumes while average prices increased 3.1% due to revenue management in the domestic market, partially compensated with negative mix effects. The lower volumes was explained by both a 14.4% fall in exports from Chile and 14.8% drop in the Chile domestic market.
Gross profit dropped 8.1%, but gross margin improved 296 basis points due to higher average prices and a decrease in cost per hectoliter due to a more favorable cost of wine. MSD&A expenses were flat versus last year and as a percentage of net sales increased 429 basis points associated with the lower business scale. In all, EBITDA reached CLP 11,606 million, a 21.2% contraction.
In terms of our main JVs and associated business in Argentina, volumes of our water business decreased low double digit, mainly impacted by a challenging consumption environment. Also, we successfully continued with the route-to-market integration of this business. Finally, in Colombia, volumes contracted low single digit. Now I will be glad to answer any questions you may have.
[Operator Instructions] Thank you. Our first question comes from Felipe Ucros from Scotiabank.
First, let me start with volumes. Clearly, the volumes were not excellent in the quarter. When you look at the third quarter of each year for the past few years, you've been coming down from a peak of 8.2, I think, in 2021 then 7.9 in '22, now 7.6. Do you think the post-pandemic correction is done. Should we be thinking about normalized volumes for hereon out? Or do you foresee that there's a little more pain ahead given what's happening with consumption in Chile?
Yes, first of all, comparing volumes, nowadays volumes with 2021 and maybe -- 2021 especially is not the right comparison because you have CLP 55 billion of pension funds withdraw in Chile and a boom in consumption. So it was -- as 2020 was the year of the pandemic, of the lockdowns, 2021 was the party in consumption in Chile due to the pension fund withdraw. So I like especially to do a comparison with pre-pandemic volumes, this is from 2019. And total CCU volumes compared to 2019 are 14% lower and compared to third quarter of '23 against third quarter 2019 is 10%. So the first pillar of HerCCUles is to preserve scale, to maintain scale, both relative scale and absolute scale.
And I think in this task, we are in this task. Regarding the third quarter volumes, of course, we came from a volume -- reduction in volume in quarter 1 of 3.4%, but we were still comparing with a very high comparison in quarter 1 of '22 because still, we had the effect once again of the pension fund withdrawal. Then we had an excellent growth in the second quarter, growing [ 4.8% ] volumes and minus 5%. And coming to Chile, of course, we decreased the volumes in quarter 1, minus 1.2% because of the big comparison. So it was a very good volume. In quarter 2, we grew 4.7% and now we decreased 4.7%. Of course, I think there is 2 factors on that. The first factor has to do with temperatures. We have had a very rainy, which is very good for Chile as a country, of course, to have good level of rain because we have drought conditions. So it's very good.
So we had a lot of rain during July, August and the start of the spring and also cold temperatures. So the decrease in volumes in Chile are partially explained by temperatures. On the other hand, of course, there is a deceleration in terms of consumption. And this -- we have been always predictive on that because HerCCUles is about maintaining scale. So overall, if you look at overall results in Chile, we are maintaining more or less this scale in absolute terms as we are a bit practical in our volumes, and our volumes in Chile are minus 0.7% less than last year. So overall, maintaining the scale. And in terms of relative scale that take into account the market share, we are holding, even growing in some categories our market share positions. That's the scenario.
Going forward, it's difficult to predict. We will continue to face, I think, a very -- at least in the next few quarters, maybe deceleration, not further -- I don't see a further deceleration in volumes. I see that we will be able to maintain the scale. I don't see something different given that. Quarter-on-quarter, it will depend on weather, it will depend on temperatures, and it's impossible to forecast weather. There are some people that said that we will have a very hot summer, but I don't know. I think meteorology is a difficult science. But in a nutshell, it is what we see in terms of consumption.
Okay. That's very helpful, Felipe. So you essentially think that you're at more or less a new baseline for the company, right? Maybe if I can do a follow-up for costs, after you've had some very good quarters of improvement on costs in recent times, and it seemed that costs didn't provide that much of a tailwind in this quarter. What's your outlook for the next few quarters?
Yes. Look, in terms of cost, I think we had some good news, but also some bad news. I think we have bad news regarding the nonalcoholic business, especially the nonalcoholic business, given the sugar prices that are at historical level and also orange juice. Orange juice, the tailwinds are very bad for orange juice and sugar. In terms of grains, it's a question of carryover of inventories. As I said in previous communications, previous conference call, last year we benefited of pre-Ukraine prices for barley. That, of course, in the global market, barley has been reducing the prices. However, we still have -- in this year, now we have benefit a lot of the pre-Ukraine cost levels but -- because of the opposite season that we have with Europe. But in general, in the year, we see stable cost -- unit costs and a lot of pressure in nonalcoholic beverages given sugar prices and orange juice.
Our next question comes from Thiago Bortoluci from Goldman Sachs.
I like to follow up now on SG&A, right? I see your efficiency ratio has marginally deteriorated, and it seems that most of the pressure was due to marketing, right? Parallel to this, we see Chile demand has been volatile. The company keeps pushing prices higher. So putting everything in perspective, I am wondering how much more marketing would you need to invest in order to keep scale amidst very volatile demand backdrop, right? And this is the first part of the question. And the second part of the question, assuming marketing will likely continue to be an important driver for you to keep volumes, how much more efficiency the HerCCUles plan could extract in other lines eventually to partially offset this and protect your EBITDA margin? And that's the question.
Overall, I would say you are right, but the MSD&A increase is a little bit in terms of percentage of net sales. I would say we recovered normal levels of marketing expenses this year compared to 2022. '22 was a very tough year in terms of results. And one of the pillars of HerCCUles, Pillar #6, is about protecting or increasing our brand equity. And this is what is we are having because without brand equity, you cannot have a good revenue management, pricing and sustaining volumes. And this is what we -- and we think we are investing for the, long, long term.
So adding up also the manufacturing expenses, we are practically flat in terms of expenses as percentage of net sales overall accumulated to the year. So we will continue to support our brands while searching efficiencies, also taking into account that we have had high levels of inflation at the beginning of the year, now it is more controlled. So for me -- for us, we are just recovering the level of marketing that where we should be. Also the indicator of percentage of net sales, although we have been doing a very robust price efforts, has been a little bit diluted by mix effects. So at the end, this mix effect also contributed at being having an increase on this ratio.
Our next question comes from Mr. Fernando Olvera, Bank of America.
The first one is related to Chile returning back to volumes. Can you comment what was the performance by channel at beer and soft drinks, if there was a difference? And my second question also in Chile, how are you thinking about your pricing strategy for next year?
Thank you, Fernando, for your question. Regarding the split between beer and nonalcoholic was very similar. We decreased in Chile the volumes around 5.7% -- 4.7%. This was the decrease in volume was for -- it was practically the same in nonalcoholic and beer because we are maintaining market share. So it was [indiscernible] in both. Temperature affect both categories, nonalcoholic and beer and the macro is affecting equally both categories. Also the mix is equally affected in both categories. So overall, that was the explanation. And the second question was about Claudio?
About your pricing strategy for next year.
Yes, we have increased, again, prices, so we are working on revenue -- always working on revenue management initiatives and looking at our promotional rationalization or promotional activities, but also we have increased price now in October in some categories, especially nonalcoholic, given the prices that will not improve of some commodities, as I said, sugar and orange juices that are putting a lot of pressure in the P&L. So regarding -- for next year, we expect at least increased prices with inflation at least.
Our next question text from Mr. Martin [ Zicha ] from Fundamental Capital. Regarding prices, should we expect CCU to push -- increase this north of inflation? Do you see space for that entering 2024?
Prices will depend on many factors. It will depend on input cost, as I said. Certainly, nonalcoholic, we should go beyond inflation even the input cost, especially sugar that is far enough. Also for your reference, sugar prices are doubled compared to 2019. So that is a lot. Orange juice are more than doubled compared to 2019. So I -- but it will depend on competition. It will depend on many factors how our brand equity is. But of course, if there are opportunities to go beyond inflation, we will go for.
Our next question comes from Mr. Henrique Brustolin from BTG Pactual.
I have 2. The first one, you mentioned that you reduced portfolio complexity, right, in your remarks. If you could give a little bit more details on that in terms of which categories were did that take part?
Hello, we lost you.
Sorry, I think we lost you for a second. Do you mind just repeating your question, please?
Yes, sure. It's the -- first one is in terms of the portfolio complexity that means that -- you wrote that it has been reduced. So just wondering, if you could give more details in terms of the categories that it happened, how relevant this might have been for volumes? And if it's achieving the intended results you planned with it? And the second one, on the beer industry in Chile, and this is more of a long-term one, but we saw a very strong growth in beer volumes in Chile over the past many years.
As you mentioned, Felipe, volumes, they remain well above prepandemic. And when we look at per capita consumption, it's now approaching the levels of other markets that were more mature for beer consumption, right? So I just wanted to hear a little bit more from you in terms of how you see the beer industry performing in Chile in the long run, right, if growth should sustain the levels of the past or if it might be closer to [indiscernible].
Yes. Okay. No, thank you for your question, Henrique. So regarding complexity, yes, the program is about to focus on high volume and high margin SKUs. So if our SKUs has now the right margin and is not providing enough volume, simply we delete, so we are deleting about 5% of the SKUs. And I think this is -- typically in this program, this should not have especially an impact on margins. And we should run very -- we should have a lot of discipline, especially with innovations to evaluate the innovation, if this provides better brand equity, is this providing better margin, is this providing better -- high volumes, okay, you have an entry ticket to enter into the system to launch it.
But if you don't provide strong additional brand equity, it doesn't provide additional volume and it doesn't provide better margin, we will not launch it. So that's in a nutshell, what is about the complexity program. Regarding your question in beer. Of course, as I mentioned to the first question, our levels of consumption are HerCCUles is about preserving the scale. And this is what we are doing. Because if I compare the accumulated volumes of the Chile Operating segment, we are talking a very strong volume compared to prepandemic volume still. We think that the growth has slowed down or would be maybe in the next few quarters, 0% growth. As I highlighted, quarter 3 was exceptional because of low temperatures. okay? The weather, we cannot do nothing about the weather.
But we think the consumer has reacted in a good way because do not consider that we have increased in Chile the prices more than 13%. Of course, we have a mix effect on that and thus, the prices, the net prices only increased 10% because 3 points were lost because of mix effect. But overall, the consumer is there, the consumption is there, and we are maintaining the level of consumption that we had last year and also growing against '19. So if you took 4 years, '23, '22, '21, '22 and the base of '19, we are growing in beer and nonalcoholic, exactly the same 19.3% compared to 2019. So if you divide this by 4 years, it's more than GDP. So in times of economic deceleration, still our products are adding to the wallet of the consumer. So maybe people will not consume other kind of eateries, nondurable. But beverage still the market is there.
We have a question from Mr. Diego Guzman from BTG Pactual Asset Management.
I have 2 questions. You specified that you did price increases in October in nonalcoholic business. So I suppose maybe that this business has a better pricing trend. But you also mentioned that cost outlook is a bit more pressured here. So mixing these 2 things, which one of the business do you think that has a better margin trend in terms of gross margins, maybe in the next 6 months or so.
And the second question is regarding the nonoperational expense -- it's an operational expense in Argentina but we see it in the nonoperational result of CLP 8,000 million something around that. Do you have maybe a [ payback ] of this or internal rate of return? Or what is can you explain us little bit deeper what are the economic or implications of these changes.
There is someone that has an open mic. Okay. Thank you. Turning off So your first question, if I understood, was about prices. Yes, as I said, nonalcoholic we have more pressure because we have more commodity price pressure from nonalcoholic commodities such as sugar and especially orange juice. Our beer business has better margins than the nonalcoholic, maybe nonalcoholic -- beer, although beer is more linked to the U.S. dollar. So we expect that at the end, both categories, of course, require at least inflation, but nonalcoholic requires more than inflation price increases to compensate this cost pressure.
Regarding the nonrecurring expenses in Argentina, this is related to the integration of the Danone water business into our sales and distribution network. So this is a nonrecurring effect, as you highlighted, up of approximately $10 million. This is the impact of our P&L, is a nonoperating because it's -- it's a JV that do not consolidate. And thus, it has an impact in our nonoperational results. Regarding the payback of that is very clear, is adding to our network between 5 million hectoliters more or less of volume that certainly will provide us a better scale in Argentina in the future, and especially in very difficult times in Argentina, it's very good to synergize both distribution networks, the one that we have for beer and the one for water.
This was an acquisition that we did last year. And then now this year, we come to a very successful integration of both businesses not only in sales and distribution but also in head office in financial services and other overheads function. So it would provide us a stronger P&L in Argentina, okay?
Okay. Just to be sure, you mentioned that both businesses will try to outrun inflation, maybe nonalcoholic [indiscernible] but which business you see has a better trend in margin normalization, beer or nonalcoholic?
No big difference this year. I think because we had last year very high aluminum prices on the one hand that affect the beer business, very high [ resin ] prices that affect the nonalcoholic business, very high malt prices, very -- so at the end, I think, as of today, both business are in the same range of normalization in terms of on average. The point is looking forward but always it is an estimate. But given what we had on the table, which are the commodity costs, certainly the nonalcoholic business has more cost pressure than the beer business.
Our next question comes from Mr. Carlos Laboy from HSBC Securities.
I was hoping you could give us more insights into how things are going in Colombia, market share, not just the volume trends, market share; how your brands are doing in the marketplace, et cetera.
Yes. Regarding Colombia, we do have maybe a little reduction in the first semester in terms of market share, however, recovering, especially in the last few months, especially in September. We have also -- we are being recuperating margin also because of input costs, again, we have a very tough situation in input costs in '22 but along the time, it's been recovering this. So still, there are work to do, especially in enhancing our brand equity of our brands in Andina especially. And also the other thing that is important, improve our sales effectiveness there. But the last time -- in the last quarter, especially in September in terms of market share are very encouraging.
[Operator Instructions] We have a follow-up question from Mr. Felipe Ucros from Scotiabank.
Yes, Felipe, I could do just one more. Just wondering if you could comment a little bit on what's going on in wine and what you expect going forward. Obviously, there's been a lot of pain, and it's not just pain for CCU, it's industry pain with destocking and wholesale channels around the world. But just wondering if you could give us your take on how you think the next few quarters will evolve for wine.
Yes. It's an industry pain as you highlighted due to destocking, and I will not repeat myself of previous dialogues that we have had on this. But I would be a little bit more optimist now because the export because -- especially in exports, in the first semester of the year, our export volumes from Chile decreased 19%, which was better than industry, but it was about 19%. In the third quarter, the reduction was 14%, which is better. But what is good is that now in October, we have, for the first month in the year increased by mid-single digits our export volumes. So it's the first positive month of the year. So going forward, we expect a recovery in terms of growing since the destocking should stop, let's say. On top of that, we are working on brand preference a lot.
We are working on enhancing our relationship with distributors also our commercial offices that we have in the U.S., in China and in the U.K. should enhance our commercial effectiveness in those markets. So maybe it's too early to call, Felipe, but we have had good news in October in terms of also in the third quarter as we decreased less than the first semester, okay? And the first positive [ final ] in October. Going forward, we should expect finally recover in terms of volume.
We'll just give another couple of seconds for any additional questions to come in. Okay. It looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks.
Thank you. Thank you to all for attending today. During quarter 3, 2023, we continue making progress to recover our financial results and profitability in a challenging and volatile economic context. Our initiatives under HerCCUles are showing positive outcomes through the year, allowing us to recover our operational results; hold business scale and market share; improve margins and strengthening, especially our cash generation. Nonetheless, we are aware that more efforts are needed to improve profitability further, especially when the business scenario will remain challenging. In order to do so, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you a wonderful day.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and have a good day. Goodbye.