© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to CCU's 4Q '18 Earnings Conference Call. Today's conference is being recorded.
And at this time, I'd like to turn the conference over to Isabel Darrigrandi, Head of Investor Relations. Please go ahead, ma'am.
Thank you. Welcome, everyone, and thank you for attending CCU's Fourth 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 fourth quarter 2018 results. Felipe will review our overall performance, and we will then move on to a Q&A. Before we begin, 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 Felipe Dubernet.
Thank you, Isabel, and thank you all for joining us. This year, CCU delivered a solid performance with consolidated volumes that increased 9.6% to 28.5 million hectoliters while EBITDA grew by 71.8% and net income rose 136.8%. These results include growth from both ongoing operations as well as a gain of CLP 208,842 million in EBITDA and CLP 157,359 million in net income from the CCU Argentina and ABI transaction executed this year. The application of hyperinflation accounting in Argentina favorably impacted EBITDA by CLP 749 million and adversely affected net income by CLP 6,087 million. Also this year, CCU Argentina opted in to a tax asset revaluation, which generated a CLP 6,822 million positive impact at net income, including CLP 103 million in related operating expenses to this. Including (sic) [ excluding ] the effects of the transaction with ABI, the application of hyperinflation accounting and the tax asset revaluation in Argentina, EBITDA increased by 7.8% and net income by 14.8%.
In the fourth quarter, volumes came in stronger than the annual trend while financial results were weaker with a consolidated EBITDA that declined 2.5% despite volume growth of 11.9%. This financial result was largely explained by the sharp depreciation of our local currencies against the U.S. dollar, primarily the Chilean pesos and the Argentine pesos, which depreciated 7.2% and 119%, respectively. These FX fluctuations had an adverse estimated effect of CLP 19,041 million on EBITDA level. Excluding these currency variations, EBITDA would have increased by 13.7%.
At the net income level, we grew 13.1% this quarter. Net income includes a loss of CLP 3,158 million from hyperinflation in Argentina as well as a CLP 1,732 million gain, mainly due to after-tax financial income related to the transaction, and a CLP 6,822 million gain from the already mentioned tax asset revaluation in Argentina. Excluding these effects, net income increased 3.4%. In the Chile Operating segment, our top line rose 5.8%, driven by volumes that increased 9.2%, partially offset by 3.2% lower average prices, primarily explained by product mix and promotional activities. Gross margin decreased by 48 basis points, primarily due to lower prices and higher U.S.-dollar-denominated costs from the weaker Chilean peso. MSD&A expenses as percentage of the net sales improved by 43 basis points, primarily due to scale and efficiencies. As a result, EBITDA grew 1.4% and EBITDA margin deteriorated by 113 basis points from 27.3% to 26.2%. Excluding the negative effect from the exchange rate fluctuation, the segment's EBITDA would have increased 8%. The International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, reported volumes that rose 19.7% with growth in all countries. Excluding Bolivia, volumes grew 11.8%.
Revenue increased by 10.5% as volume growth was partially offset by lower average prices in Chilean pesos due to the impact of the 19.4% (sic) [ 99.4% ] depreciation of the Argentine peso against the Chilean peso. Given that price increases in local currencies were not yet enough to offset the FX pressures on U.S.-dollar-linked costs, gross margin contracted from 59.6% to 48.5%. Our MSD&A expenses as percentage of net sales improved 274 basis points, thanks to efficiencies from the ExCCelencia CCU program and fixed expense dilution. All in, EBITDA decreased by 13.3%. EBITDA margin deteriorated by 436 basis points from 20.3% to 15.9%. Excluding the adverse effect of currency fluctuations, the segment EBITDA would have increased 33.8%. The Wine Operating segment reported an 11.4% increase in revenue, explained by a 1.7% rise in volumes and 9.5% higher average prices in Chilean peso. The higher average price was explained by an increase in prices in the domestic market and the positive tailwind on export revenues from the stronger U.S. dollar against the Chilean peso and Argentine peso. The segment gross margin finally marked a turning point this quarter with an improvement of 310 basis points from 35.3% to 38.4%, explained by the aforementioned higher average price as well as lower cost of wine in a portion of our sales, thanks to the 2018 harvest yields, which returned to historical average levels. MSD&A as a percentage of net sales also improved this quarter by 220 basis points, explained by greater operating efficiencies. As a result, EBITDA increased by 92.1% and EBITDA margin improved but -- by 800 basis points from 11% to 19%. Excluding the favorable impact from stronger dollar, the segment EBITDA would have increased 67.6%. Finally, in Colombia, where we have a joint venture with Postobón, our volumes of our mainly imported premium beer portfolio grew 33.5%, surpassing 0.5 million hectoliters in 2018. In February 2019, we launched our local beer brand, Andina, which is well represented with its slogan, Colombia in a beer, produced in our new, state-of-the-art 3 million hectoliter brewery located in the outskirts of Bogota. Built to international standard specifications, the new plant will also soon begin producing the above-mentioned beer portfolio, including Heineken, among other beers. Now I will be glad to answer any question you may have.
[Operator Instructions] We'll take our first question from -- caller, your line's open. Please check your mute button.
Luis Miranda, Santander. I hope you can help us to give some color considering the performance of promotions and discounts in Chile. And when do you think we could start to see more stable prices coming from less promotional activity? Or do you think this could continue throughout 2019? And the second question is regarding the ExCCelencia program. And you were mentioning in the press release the strategic plan for 2019. Is there any color or some figures in order of the savings that we could expect in 2019?
Luis, thank you for your question. Let me answer -- and more a comprehensive answer on the Chilean market. Overall, we had a very good year in Chile with a 7.4% EBITDA growth, margin expansion and a very positive trend in terms of volume growth of 5.6% volume growth. In the second half of the year, we faced increased competition, particularly in beer. Also -- but also, on the positive side, we saw industry growth in both beer and nonalcoholic beverage industries. I would say that we are very happy with this trend. In terms of industry growth, both beer and nonalcoholic grew mid-single digits. So regarding the promotional activity, it was particularly intense, I would say, in quarter 4 and is -- we cannot do a forecast about what competition we will do in 2009 (sic) [ 2019 ]. They have been -- the market in Chile, as you know, is very competitive. So that, I would say, in the quarter, the -- was very promoted, including beer and also nonalcoholic and spirits, particularly in the supermarket channel. We have faced in the past also this kind of competition, us, for example, very intensive 2016. But on the other hand, there is the profitability of the segment. As you know, at the end of the year, the Chilean peso depreciated 7.2% against the U.S. dollar in a very short period of time. Given the promotional activities we had underway, it was difficult to react in time with revenue management effort to compensate for the FX impact on our costs. In the coming months, our objective, as always, will be to enhance our revenue management efforts to compensate the cost pressures from external effects, including the higher dollar and increased raw material prices, if it is the case. Your second question regarding the ExCCelencia CCU program, we don't disclose the trailing numbers because these are internal figures. But what I can say is that given the statement pressure, it makes more sense to continue with our efficiency efforts in the future.
[Operator Instructions] It appears we have no further questions at this time. We just received a question in the queue. We'll take that question from...
Yes, I have a follow-up question just in International Business. If you could give some color -- when you took a look at the volume growth on a pro forma there, the -- excluding Bolivia, we -- you also posted a very healthy volume growth. I don't know if you could give us some color which -- where -- within it's outperforming? And especially when we take a look at prices, Bolivia, Paraguay, Uruguay, in terms of local currency, where are you being able to price above inflation?
Yes. I think it's Luis who's asking the -- a question again. Luis, yes. We -- in the fourth quarter, our International Business Operating segment presented an 8 consecutive quarter of double-digit volume growth, even excluding Bolivia that we consolidate from August. But what I want to highlight is that our volume growth deconsolidate compared to earlier 2018 year and -- particularly given the macroeconomic challenges in Argentina, as you know. So on that sense, given these challenges in terms of exchange rate especially in 2019 and also inflation, we face considerable cost pressure due to this depreciation of the Argentine peso. In the last couple of quarters, we have increased prices in line with inflation, but this has not been enough to offset the impact of the devaluation of the Argentine peso on our costs. So the inflation in the industry is higher than the inflation of the consumer, let's say, of the consumer price index. So it's not enough. And as a consequence, we need to reinforce our revenue management efforts to compensate that. On the other hand, in the other countries like Uruguay, Paraguay, we are a small player in these countries. But always, the aim is to enhance our revenue management efforts at least to increase prices in line with inflation.
We'll take our next question from...
Hi, hello. Can you hear me?
Yes, I can hear you.
Oh, perfect. It's Fernando Olvera from Bank of America Merrill Lynch. Just a follow-up regarding Argentina. Can you share with us your -- what will be your pricing strategy this year, given FX? And also, can you share your outlook on consolidation in Argentina? That's my first question. And my second question is regarding the wine business. Also, if you can share your cost or how should we're seeing that EBITDA margin should behave in the wine business this year. And what is your outlook on the coming harvest?
Fernando, thank you for your questions. I already answered the question regarding pricing in Argentina. We have a high inflation cost of the industry. And still, we need more, more pricing to compensate and to recover the profitability we had a year ago. So we need to continue to do revenue management efforts on that sense. Regarding consumption, yes, the challenges the economy is facing in Argentina, higher level of inflation, devaluation of the currency, certainly is impacting the industry growth, particularly the volumes are decelerating. On the other hand, internally, our team has done a wonderful job managing our beer portfolio and poses -- post -- and even if -- and putting a price position in every brand in order to sort out the consumption challenges. So as a result, Schneider, Imperial, Heineken and Miller, our strategic brands, along with other brands in Argentina, make a very strong and diversified beer portfolio, which cover the full range of price points and consumer taste. But by saying that, our volumes -- we are not having the growth we had in the third semester of 2019 (sic) [ 2018 ]. Wine business. As we mentioned in previous calls and conferences, our margins are improving, thanks to a 2018 harvest, who -- which come back to normal levels. So far, the 2019 harvest is okay. It's just the starting. But I would recall that in 2016 in April, in Chile central zone, we experienced heavy rain. You know, the economy is difficult to predict. Meteorology is impossible. So until the harvest is not completed by the end of May, we cannot ensure how much -- how good or bad it would be. So far, so good. But taking to account that the cost of the new harvest, the wine produced that -- [ with trace ] of the 2019 harvest would have an impact on the P&L towards the end of the year. So maybe in the next few quarter, quarter 2, quarter 3, we will continue to see improvement in our gross margin, thanks to the 2018 harvest.
[Operator Instructions] And we have no questions in the queue at this time.
Okay. Thank you. Thank you all for your question. As I understand, there is no more questions.
So now let me give you a final words on the -- on that. First of all, I would like to highlight the very important launch in the Columbia project. In fact, Patricio Jottar, our Chief Executive Officer, is not here today for this conference. So he apologized. But he has a very good reason for not being here because he's currently in Colombia visiting our -- the point of sales together with our partners from Postobón and the top executives of Central Cervecera to directly see on the ground level the execution of the Andina launch. So far, it's too early to evaluate the performance of the brand in the market, but the first signs are very positive. Looking back at 2018, we continue to consolidate our regional leadership as a multi-category beverage company. CCU delivered a profitable and sustainable growth and executed value-add transaction while navigating Argentina's macroeconomic headwinds and an adverse effect of hyperinflation accounting as well as meeting the day-to-day challenges of competing with global players in all our markets. Looking ahead, we have put together a 2019-2021 strategic plan that continues to be based on our 3 strategic pillars: growth, profitability and sustainability. Our plan has 6 strategic goals: grow profitability in all our business units, strengthen our brands, continue to innovate, execute at -- execute our CCU ExCCelencia plan to capture additional efficiencies, continue working towards the integral developments of our employees and taking care of our planet through the development and implementation of our 2030 environmental vision. Thank you all and have a wonderful day.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation.