CCU (Compañía Cervecerías Unidas) reported a mixture of recovery and challenges in its Fourth Quarter 2023 Earnings Conference Call on February 28th. While the company saw a rise in operating results and profitability with a 6% growth in consolidated EBITDA and an improved margin, net income fell by 10.6% compared to the previous year.
The beverage company's performance was influenced by a complex business environment, including lower consumption in key markets and unfavorable weather affecting sales.
Key Takeaways
- Consolidated EBITDA increased by 6%, with an improvement in EBITDA margin by 159 basis points.
- Consolidated net income saw a contraction of 10.6% compared to the previous year.
- The company launched the HerCCUles plan to strengthen business scale, revenue management, and efficiency.
- Consolidated volumes decreased by 3.4%, with significant impacts from Argentina, wine exports, and Chile.
- Revenue management initiatives helped mitigate cost pressures and negative mix effects.
- The Chilean operating segment expanded EBITDA by 20.9%, while the International segment, including Argentina, saw a 53.7% EBITDA contraction.
- The Wine Operating segment experienced a 21.3% decrease in EBITDA.
- CCU anticipates low to mid-single-digit growth in Chile for the coming year, excluding weather impacts.
- Exchange rate fluctuations remain a primary risk, with plans to counter through revenue management and efficiency efforts.
Company Outlook
- Expectations for low to mid-single-digit growth in Chile, excluding weather-related impacts.
- Plans to maintain profitability in Argentina with revenue management and efficiency initiatives.
- Implementation of cost control measures to improve profitability in the wine segment.
- Focus on premiumization, innovation, and execution to drive performance in key wine markets.
Bearish Highlights
- A decrease in consolidated net income by 10.6% year-over-year.
- Consolidated volumes fell by 3.4% in 2023 due to lower consumption in Argentina, difficult wine export business, and deceleration in Chile.
- The International Operating segment saw a significant EBITDA contraction of 53.7%.
Bullish Highlights
- Successful revenue management initiatives to counter cost and expense pressures.
- Efficiency gains achieved by reducing the number of SKUs and focusing on core brands and profitable innovation.
- The Chilean operating segment's EBITDA grew by 20.9%, with a notable margin improvement.
Misses
- Consolidated EBITDA dropped by 9.9% in the fourth quarter, mainly due to the Argentine peso devaluation.
- The Wine Operating segment's EBITDA decreased by 21.3%.
Q&A Highlights
- CCU discussed the negative impact of unfavorable weather on beverage sales and volume, which declined by 7.3%.
- The company outlined the impact of foreign exchange rate fluctuations, stating a devaluation of CLP10 could result in a CLP2,000 million effect on EBITDA.
- Efforts to improve the wine segment's performance include focusing on premium products, innovation, and better execution in key markets.
- Growth and profitability strategies for 2024 include enhancing export volume, innovating with brand extensions, and opening commercial offices in strategic locations.
InvestingPro Insights
Compañía Cervecerías Unidas (CCU) has faced a challenging environment, as highlighted in their recent earnings call. InvestingPro provides additional insights that may help investors understand the company's financial health and market position.
With a market capitalization of $2.14 billion and a Price/Earnings (P/E) ratio of 19.85, CCU is valued by the market at a level that suggests investors are expecting earnings to grow at a moderate pace. The P/E ratio aligns closely with the adjusted P/E ratio for the last twelve months as of Q4 2023, indicating that the company's earnings performance has been consistent.
The gross profit margin stands at an impressive 46.26%, which is a testament to CCU's ability to maintain profitability despite the reported decrease in net income and consolidated volumes. This margin is a critical factor, especially when considering the company's efficiency initiatives and focus on profitability.
InvestingPro Tips highlight CCU as a "Prominent player in the Beverages industry," which aligns with the company's strategic focus on premiumization and innovation within its market segment. Additionally, CCU's ability to maintain dividend payments for 32 consecutive years is a significant sign of its commitment to shareholder returns, which may be of interest to investors looking for stable dividend-paying stocks.
For those interested in delving deeper into the company's performance and potential, InvestingPro offers additional tips, including an analysis of the company's low price volatility and its liquidity position, where liquid assets exceed short-term obligations. To access these insights and more, investors can visit https://www.investing.com/pro/CCU, and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are six more InvestingPro Tips available for CCU that could provide further guidance on investment decisions.
Full transcript - Compania Cervecerias Unidas SA (NYSE:CCU) Q4 2023:
Operator: Ladies and gentlemen, good day, and welcome to CCU’s Fourth Quarter 2023 Earnings Conference Call on the 28th of February. Today’s conference 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.
Claudio Las Heras: Welcome, everyone, and thank you for attending CCU’s fourth quarter 2023 conference call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer; and Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company’s consolidated fourth quarter 2023 results. Felipe will review our overall results, and we will then move on to a Q&A session. Before we begin, 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 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 our CFO, Mr. Felipe Dubernet.
Felipe Dubernet: Thank you, Claudio, and thank you to all for joining us today. During 2023, we posted a recovery in our operating results and profitability in spite of the volatile business environment, a particularly difficult year for the wine export business and Argentina’s macroeconomic conditions. Our consolidated EBITDA in the year grew 6% and the EBITDA margin improved 159 basis points, driven by our main operating segment, Chile, which expanded EBITDA by 24.8% more than offsetting a 37.4% drop in the Wine Operating segment and a 16% contraction in International Business Operating segment, which includes Argentina. Consolidated net income contracted 10.6% versus 2022. The driver for the better operational result was the execution of our regional plan HerCCUles, which encompasses six pillars: Number one, maintain business scale; number two, strengthen revenue management efforts; number three, deliver efficiency gains through our transformation program; number four, optimizing CapEx and working capital; number five, focusing on core brands and high-volume margin innovations; and number six, continue investing in our brand equity. I would like to briefly mention some of the highlights of the year for each pillar. In terms of pillar number one, consolidated volumes in 2023 were 3.4% below last year, mainly driven by lower consumption in Argentina for the year, a tough scenario for Chilean wine export and a deceleration in volumes in Chile during the second semester. Nonetheless, we maintained relative scale by keeping increasing market shares in our main categories. As for pillar number two, we executed revenue management initiatives in all our geographies, especially noticeable in Chile, where average prices increased 7.9% being key to recover margins, offsetting cost and expense pressures and negative mix effects. Regarding pillar number three, we were able to deliver efficiency during the year, as total expenses, including manufacturing cost of MSD&A as a percentage of net sales were stable at 47.7% in 2020 through [ph] 2022 and 2023. In terms of pillar number four, we recovered our cash generation, mainly due to a reduction in working capital versus 2022, CapEx optimization and a higher EBITDA. Finally, in line with pillar number five and pillar number six, we reduced the number of SKUs following us to focus in core brands and profitable innovation, reducing the complexity of our operations, and we posted solid levels of running [ph]. From a quarterly perspective, consolidated EBITDA dropped 9.9% and EBITDA margin was up from 16% to 19.3%. In this quarter, it is important to mention that the charge devaluation of the Argentine peso against the U.S. dollar generated a material impact in our results in quarter four, 2023. The Argentine currency jumped at 131%, the exchange rate from CLP350 and CLP50 per dollar as of September 30, 2023, to CLP808.5 per dollar as of December 31, 2023. Thus, Argentina is under hyperinflation accounting according to the IAS 29, accumulated results in Argentina as of September 30, 2023 are updated to prices and exchange rate levels to the end of the period. This generated a loss in the quarter CLP24,018 million in consolidated EBITDA, of which CLP22,804 million are accounted in International Business Operating segment and CLP1,250 million are accounted in the Wine Operating segment. Excluding these effects, consolidated EBITDA in the quarter would have expanded 3.4% versus same quarter of last year. In terms of the segment, in the key operating segment, top-line decreased 2.2% in the last quarter due to a 7.3% contraction in volumes, partially compensated with 5.5% higher average prices. Lower volumes were mostly related to a weakening demand, which was especially affected by weather conditions. While prices were driven by revenue management initiatives, EBITDA increased 20.9% and EBITDA margin improved and expanded from 14.2% to 17.5%. In International Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales dropped 90%, mainly as a result of a contraction of 89.4% in average prices in Chilean pesos due to the impact of hyperinflation accounting stated above as prices in local currency evolves in line with inflation. Volumes contracted 8.3%, fully explained by Argentina as all the other geographies posted positive volume growth. EBITDA contracted 53.7%. In the Wine Operating segment, revenues were down 11.7%, mainly explained by an 8.8% decrease in volumes driven by a 10.2% decrease in the Chile domestic market and a 5.6% contraction in exports from Chile. Average prices contracted by 3.1%, also due to the impact of hyperinflation accounting stated above in our wine business in Argentina and a stronger Chilean peso against the U.S. dollar, which impacted negatively our export revenues. Partially offset by revenue management initiatives in our domestic markets, EBITDA decreased 21.3% [ph]. Regarding our main JV and associated business from a yearly perspective, in Colombia volumes contracted low-single digit in 2023, in a scenario of weaker consumption. In Argentina, our water business recorded mid-single digit growth in volumes, despite the complex economic environment, explained by the strength of the brands and a successful route-to-market integration of this business into our operations. Now I will be glad to answer any question you may have.
Operator: Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. [Operator Instructions] The first question we have is from Mr. Felipe Ucros from Scotiabank (TSX:BNS). Please go ahead, sir. Your line is open.
Felipe Ucros: Thanks operator. Good morning, Felipe, Joaquín, and team. Thanks for the space. So my first question is on Argentina. Obviously a messy quarter. All the hyperinflationary accounting effects kind of muddy up the quarter. But how did the quarter start for Argentina in 2024? How are things looking there? And then if I can, I'll do a follow-up. Thanks.
Felipe Dubernet: Thank you, Felipe, for your question regarding Argentina. The quarter maintained exactly the same trend as we had in quarter four. So we continue to increase prices in line with inflation. Inflation level during January was 20.5% in Argentina. This is public data. And we are experiencing industry contraction of, let's say, high single digit, let's say during January for the time being. It is expected that we will have a lower level of inflation in Argentina in February. We do not have official data, but we will continue our revenue management efforts there in order to keep profitability in Argentina.
Felipe Ucros: Great. Great. Before I move to the next question, Felipe, great comment on how the consumer is doing. Let me ask you, do you expect kind of margins to deteriorate as you eventually have to adjust employees in Argentina or what type of margin environment do you expect as the year starts?
Felipe Dubernet: Look, I will not give you a forward look [ph]. In Argentina all the pillars of HerCCUles are completely valid, let's say. Of course we would like to maintain business scale, but it would be difficult given the macro environment. But at least relative scale we are maintaining thanks to this because we – our portfolio ended up as getting in a very strong way, let's say. So the relative scale would be maintained. The big answer would be, let's say how much the industry would suffer. The good news is if the government plans works in terms of having lower levels of inflation, maybe we could experience, let's say, some relief in terms of the contraction of the volumes. But all the pillars are towards, let's say, not suffering in profitability terms. Let's say we will continue revenue management efforts there as I pointed out, efficiencies are keys. A number of projects in several areas, logistics, manufacturing, in terms of expense control are very valid on that. Also taking care of the cash is important of working capital inventory reduction. We have in fact reduced our inventory levels, let's say, to work with less safety in terms of reacting, of course maintaining flexibility towards the market, but in a more efficient way. Also portfolio rationalization is something important. Enhancing also investing behind returnable packaging also is a way to protect our profitability. And of course, because all of these should be – it need to be possible, thanks of our high levels of, or good levels of brand equity to continue invest behind the brands, because without a stronger brand, you don't have – it would be very difficult to maintain our relative scale.
Felipe Ucros: Very clear. Thanks very much for that. Maybe if I can do a second one on Chile. Weather seems to have been a factor in the quarter and I think your peers reported exactly the same thing. So I'm wondering how did results look if you kind of didn't have the weather effects? And what I mean is I'm trying to gauge how the consumer is doing if you put aside the weather factor?
Felipe Dubernet: Oh, that's very difficult. I asked for a – we need an algorithm for that. Of course, we have some internal algorithms, but is the predict how much? So I think there is a weaker demand itself in the consumer. The consumer is not in the same shape as it used to be in 2021 and beginning of 2022 period. We know that. We have had two bad quarters, quarter three and four in terms of not good weather conditions for selling refrigerated drinks, let's say. The majority of our portfolio need to be drink. Of course, it was unfavorable in terms of rain, in terms of temperatures. So factoring out the weather would be we decrease 7.3%. I would not attribute 100% to the weather, but I don't have a number to provide to you – exact number to provide to you. How much the weather would influence on this decrease in volume would be difficult. Maybe an indicator could be quarter one, that we have had more stable weather in terms of temperatures, but still it's too early to call the quarter one. January has started in good shape with low-single digit growth because we have a more normalized weather. But certainly, as I mentioned in previous conference call without giving you future forecast, because it's difficult on that, because there are several factor risk and uncertainties. I think low-single digit between mid- and low-single digit should be the growth if you take out the weather and it's aligned with GDP in Chile.
Felipe Ucros: That's super helpful, especially the comments on January, that helps us a lot. So thanks for that Felipe. I will hand it back to you. Thanks.
Operator: Thank you very much. We also have acknowledged the text question from Mr. Pablo Bello from BTG, which we believe was answered this question – in this answer about Argentina. The next voice question comes from Mr. Fernando Olvera from Bank of America (NYSE:BAC). Please go ahead. Sir, your line is open.
Fernando Olvera: Hi. Good morning – good afternoon. Thanks for taking my questions. I have two. The first one is related to Chile. If you can comment what is your outlook on cost and how FX will play in coming quarters? And if you can share some color of how margins should behave this year, particularly in Chile? That's my first question and I have a second one. Thanks.
Felipe Dubernet: First of all, Pablo, I already answered the question regarding Argentina to Felipe. Anyway, thank you for your question. Fernando, yes, I would – of course, you pointed out the main risk that we are facing nowadays in terms of FX. Today, USD is 980 which is much higher than what we had in previous quarters, and we have a pressure on that in terms of, of course. As an example, last year, U.S. dollar was – average exchange rate in Chile was 839. Now we are, let's say, more than CLP100 more, so this is more than 10%. And this has – would have certainly an impact in our P&L, in our cost structure. Although commodities are stable with the exception of sugar, let's say, but commodities are stable. What we need to do at the end is to compensate that in order to have more stable EBITDA margins. And this, we need to enhance our revenue management efforts, enhance our efficiency efforts also to speed up some projects that we have in terms of efficiencies. And improved mix also is a way to compensate this pressure in terms of the U.S. dollar. And this is fully aligned with HerCCUles, but you pointed out that is one of the risks that we are facing.
Fernando Olvera: Okay. Great. Felipe, and my second question is related to your SKUs reduction. If you can comment about that to give us an idea of how many SKUs you eliminated in 2023? Any idea of how this favor your profitability and if you are going to continue with the SKU reduction this year? Thank you.
Felipe Dubernet: Well, we took out about – for our offers about 100 SKUs, but this does not represent, it should be in terms of percentage, about 5%. But the idea is not reducing all the time you do tacking the tailing, let's say, SKU reduction, but the incentive of that is to really if we need to launch something when innovation should be relevant, should be – should have better margins, should improve the brand equity of the category of the portfolio, improve brand equity, deliver higher margins and also improved volumes. So at the end, it's an exercise that we should – it is about discipline on that.
Fernando Olvera: Okay. Great. Thank you, Felipe.
Operator: Thank you very much. [Operator Instructions] Our next question comes from Mr. Ulises Bolio from J.P. Morgan. Please go ahead sir.
Ulises Bolio: Hi guys. Thanks so much for the space questions. A couple of follow-ups on my side. So first on the Chile volumes; can you provide a little bit of detail how was the performance there on the alcoholic versus non-alcoholic? And maybe a double click there on how those more premium beer categories continue to perform there? And then the other one on FX, I just wanted to hear your thoughts more or less what is kind of being embedded in your budget in terms of FX for the year? And what are you thinking in terms of the pricing that you need to do to kind of offset this pressure? Thanks so much.
Felipe Dubernet: Yes. Regarding your first question, volumes in quarter four were exactly the very similar in both non-alcoholic and beer [ph], no big difference in terms of decrease for both. So we are talking about between mid- to high-single digit, let's say. Because overall, decrease in volumes in Chile was 7%, so was very similar across the board. Regarding FX, yes, we will have a significant effect on this. More or less 70% or 75% are linked to the U.S. dollar of our direct cost, raw material costs, packaging material cost and also energy costs. So we need to do efforts in revenue management certainly to compensate because every – let's say, CLP10 of devaluation, more or less is about CLP2,000 million effect in our EBITDA being compensated by – that are already compensated by the export business. So this is net of the export that we have in wine, especially that compensate somewhat at the consolidated level. So if you have a sustained CLP100, so we need to deliver in our P&L, extra between CLP20,000 million to CLP25,000 million. So this is a significant number if you look at the total EBITDA of Chile. So it should be a combination of tools, let's say, revenue management, efficiencies, cost and expense control so it's something in order to have stable margins, let's say.
Ulises Bolio: Okay. Thank you. That is very clear. And then just on that FX question. Are you able to share more or less what you are budgeting in terms of that, like for your plan for 2024? What kind of FX are you using? And then just to have that as maybe a kind of a benchmark of what we should be thinking about in that sense and the impacts on costs?
Felipe Dubernet: I’m not an economist, I am not a methodologist, so I cannot predict weather neither exchange rate. I would not like to do a prediction on exchange rate. I can give you current exchange rate, okay? This is the best projection you have, the current one. And maybe you could look at Bloomberg to the futures of the Chilean peso. So current exchange rate is CLP960. I will ask Joaquín how are the prediction of the U.S. dollar? How much is – yes, it’s like that. Today, spot price is CLP960, a year ago or – no, average of last year was CLP840. So it’s a pressure in exchange rate. And it’s a pressure that has increased since January.
Ulises Bolio: All right, no, I think that’s fair enough. So, I was kind of putting you in a tough position there, but understood. Thanks so much for the color there, guys.
Operator: Thank you very much. We have a follow-up question from Mr. Felipe Ucros from Scotiabank. Please go ahead sir.
Felipe Ucros: Thanks, operator. Since it seemed there wasn’t anybody else on the queue, I thought I’d take advantage and ask another one, Felipe, so thanks. I know wine is not the largest segment. So it might be unusual to ask about this one. But strategically speaking, it’s the segment that seems more challenged in the long term. Volumes have been falling for the larger part of the last few years. And I know it’s not a CCU problem. It’s an industry problem. We’ve seen it across wines throughout the world. But just wondering if there’s a plan to kind of turn around that dynamic or kind of offset that decline in wine consumption. Anything you guys are thinking of to improve performance in that segment?
Felipe Dubernet: Yes. Thank you, Felipe, for your question. Of course, we suffered a terrible 2023 in the wine export industry not only in Chile, but also Argentina, I saw some numbers yesterday, some numbers yesterday of decrease of Australia exports, Chile exports. So, I think there are factors that are related of the carrying inventory units of places that are far from consumption centers. So there is something of the economics of the export that has an influence and given the interest rate that especially in the U.S., has not reduced. Yes, the same interest rate is still, we are less competitive in terms of carrying out inventory cost. So we experienced this in 2023. Now, what I would say, we are seeing some green, let’s say, green grass of some embryonari [ph] good signals in terms that we expect at least in the first quarter to have some growth in terms of the exports volume. As you pointed out, there is a global industry in terms of volume that has decreased, but there are some tools that we need to look at. So of course, premiumization, something innovation, it is a category that needs innovation. We are innovating a lot especially in the domestic market in Chile through brand extensions, sweet wine in order to keep – to maintain the scale, especially in the domestic market. Also Sparkling Wine is doing very well. In the exports are more complicated because you have – as I mentioned, we have some constraints there because it’s difficult to a global branding. No one has a few that have really global branding in terms of wine, it’s country by country, region by region. So it is difficult. So what we are working in order to make it more profitable and to sustain the scale, even growing in some markets is through improving our execution. And it’s all about execution, especially in some key markets. We opened a commercial office in China, also in the U.S. and in the UK so with these three, let’s say, new endeavors, we think we would significantly improve the execution in those markets
Felipe Ucros: That’s very clear. Thanks so much for the color.
Claudio Las Heras: Okay. Thank you very much. Our final question is a text question from Mr. Alessandro Conti from Jefferies. Are you planning on initiating cost-cutting initiatives, especially in Chile, do you see any foreseeable improvement in margins?
Felipe Dubernet: Yes. Cost cutting seems a little bit aggressive, let’s say, I would say, cost control to make with the same resources better and more. But of course, our efficiency plan is in place in terms of improving expenses, the key indicators are expenses over revenue and that we need to reduce that in the long-term or in the medium term and also this year. So we have plans for that, special expense level. In costs themselves, it depends a lot on the market, the exchange rate, the direct cost of raw material, and packaging materials. So of course, is a key pillar, pillar number three in terms of efficiency in order to keep the pace with these gains. If this would be reflected or not in the bottom line, it would depend on other factors, let’s say. But the priority is one key pillar of HerCCUles are efficiencies.
Operator: Okay, thank you very much for the answer. We see no further questions at this point. I’ll pass the line back to the management team for their concluding remarks.
Felipe Dubernet: In 2024, we will continue working under our three strategic pillars: growth, profitability and sustainability, and we will keep implementing HerCCUles. We know that the environment in the region will continue to be challenging, especially in Argentina. Nonetheless, we expect to be able to continue on the recovery path of our financial results and profitability. Finally, I would like to thank all our employees, given their hard work and commitment with CCU, we have been able to navigate challenging years. We will continue working united to sustain a path of profitable and sustainable growth. Thank you, and have a wonderful end of the day.
Operator: Thank you very much. This concludes today’s conference call. We’ll now be closing all the lines. Thank you, and goodbye.
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