Good day, and welcome to the CCU Q2 '17 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Linda Walstra, Head of Investor Relations. Please go ahead. .

Welcome, everyone, and thank you for attending CCU Second Quarter 2017 Conference Call. Today with me are Felipe Dubernet, Chief Financial Officer; Matías Rojas, Financial Planning and Investor Relations Manager; and Carolina Burgos, Senior Financial Analyst. You have received a copy of the company's consolidated second quarter 2017 results.

Felipe will review our overall performance, and we will then move on to the 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 SVS and available on our webpage. .

It is now my pleasure to introduce Felipe Dubernet. .

Thank you, Linda, and thank you all for joining us today. Our second quarter 2017 results showed an increase in EBITDA of 28.7%, continuing our positive trend. Despite adverse economic conditions in our different geographies, we have been able to grow our consolidated volumes 7.1%.

The volume growth was driven by the International Business Operating segment, which experienced a volume growth of 26.5%, followed by the Chile Operating segment with 2.7% growth and partially offset by a 3.2% volume decrease in the Wine Operating segment. .

Our EBITDA improvement was driven by both the Chile and the International Business Operating segments, as a result of the before mentioned volume growth, revenue management and the efficiencies obtained through the ExCCelencia CCU program.

At the same time, the Wine Operating segment experienced a decrease in EBITDA, not only due to the lower volumes, but for mostly significant higher cost of wine, which by itself represents 7.7% of the CCU's consolidated EBITDA. Our consolidated EBITDA margin improved 167 basis points from 11.2% to 12.9%.

When excluding the restructuring costs we incurred in the second quarter of 2016, our EBITDA increased 19%, a margin improvement of 75 basis points. All-in, our net income increased 34.6%. .

In the Chile Operating segment, our top line grew 6.9% as a result of 2.7% higher volumes combined with 4.1% higher average prices. We managed this volume and price growth despite a weak economic environment, as represented by a weak IMACEC of 1%, and pessimistic consumer confidence.

Despite an intense competitive environment, we managed to maintain our overall market share. Gross profit increased 7.7%, an improvement of 39 basis points as percentage of net sales.

The initiatives of the ExCCelencia CCU program, including the combination of the route to market of the beer and nonalcoholic categories, enabled us to achieve additional efficiencies, especially in logistics, decreasing our MSD&A as a percentage of net sales by 229 basis points.

All in, we had an EBITDA growth of 23.9% translated into an EBITDA margin of 18%, an improvement of 247 basis points. When excluding the restructuring costs we incurred in the second quarter of 2016, our EBITDA increased 17.8%, a margin improvement of 167 basis points.

The International Business Operating segment, which consists of the operations in Argentina, Uruguay and Paraguay, reported top line growth of 42.8%, driven by 26.5% higher volumes, combined with 12.9% higher average price in Chilean peso terms. .

Volume growth was driven by favorable weather conditions, growth of the beer industry and market share gains in Argentina, and also by volume growth in Paraguay and Uruguay.

The higher average prices resulting from our revenue management efforts in order to keep up with inflation levels, together with efficiencies and scale effect of the strong volume growth on fixed manufacturing costs, have enabled us to achieve a 541 basis point improvement in gross margin, from 51.2% to 56.6%.

Further efficiency gains have enabled us to achieve a 617 basis points decrease in our MSD&A as a percentage of net sales. All-in, our EBITDA improved from a negative to a positive EBITDA. .

The Wine Operating segment reported a top line contraction of 0.7% as a result of 3.2% volume decrease, combined with 2.6% higher average prices in Chilean peso terms. The volume decrease is the result of our export volumes.

Despite the higher average prices, our gross margin contracted 520 basis points as a result of the CLP 3,437 million higher cost of the wine following 2 consecutive weak harvests.

With relatively stable MSD&A, the gross margin contraction has resulted in a decrease of our EBITDA margin by 584 basis points, from 23.4% to 17.6%, which has translated in a decrease of 25.4%. .

Now, I will be glad to answer any questions you may have. .

[Operator Instructions] We'll now take our first question. .

This is Antonio Gonzalez from Crédit Suisse. I just had 2 quick questions. The first one on Argentina. I understand it's been a few quarters now that you've made these comments about positive market share dynamics that you're seeing in the country.

And I wanted to see if you can elaborate a bit more on which channel specifically, which brands are seeing the best performance? And if you are, in your opinion, differentiating in terms of price points vis-à-vis your largest competitor there? And then, secondly, just very quickly on Colombia, I wanted to see if you can give us an update on what's the most recent scale of the business that you've been sharing in terms of what's volume and I don't know if you can share revenues and EBITDA result that Colombian venture is yielding at the moment.

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Antonio, thank you for your question. Okay, regarding Argentina, you are right, after a very difficult 2016, when the economy was not flourishing, let's say, in Argentina, in the last 3 quarters, we have experienced a very impressive volume growth, I would say, especially in quarter 1 this year and quarter 2 of this year.

Yes, I think, it's a combination of several factors. The good results was seen especially in quarter 2, whilst we are experiencing a high industry growth in Argentina of the brewery industry, first of all. This is pushing our volumes up.

On the second hand, also, it's about favorable weather, when compared with the same quarter last year, also has had, we think, has had an influence on the growth of the industry. We are also seeing some signs of economic recovery in Argentina, especially in consumption.

But at the same time, we are making some market share gains all across the portfolio, let's say. We are very satisfied with the performance of our premium portfolio, especially Heineken and Imperial.

Imperial, for the last time, has begin to be in the heart of the consumer more and more, and this is indicated by all the measurements we do in brand preference. Also, it is fair to say that we included from April a [indiscernible] to our portfolio. It still is a small volume, but we think it will have a good fit to the overall portfolio.

Also, in the mainstream, we are gaining brand preference in Schneider, and also in -- as you know, we have the license of Budweiser also is making progress in terms of volume. All along, we think that the full portfolio is growing, and we are in liquid to cycle also because the industry is growing.

Regarding your second question about Colombia, so Colombia, today, is not an import business. So we import Heineken, mainly Coors Light. So results have been sustained. Of course, financial results are -- we have a negative EBITDA because we are just starting to introduce an imported portfolio there.

So the most important in Colombia is the construction of the beer plant in the Bogota region, and this will be ready by second half of 2018. The project -- the scale of this plant will be up to 3 million hectoliters, as you know. So we are making progress in introducing the international portfolio there of our licenses, such as Coors, also Heineken.

And we have also to our portfolio 3 Cordilleras, which is a craft brand.

So all the focus today is to continue to progress in the customer expansion base, first of all, introducing the premium portfolio, especially Heineken and Coors in the north of Colombia, and focusing in achieving the first half of the plant, which is -- will be in first half of 2018. .

And we'll take our next question. .

This is HJ from International Value Advisers. I have 2 questions.

First of all, could you give us some sense of volume growth of Chilean beer and nonalcoholic beverages separately? Secondly, regarding the Colombia JV, is there any timeframe that you expect the JV to breakeven?.

Thank you, HJ, for your questions. As you know, we don't disclose separate volume growth for different categories. What I can say that beer -- the beer industry in Chile continue to grow at low single digits, let's say. In the nonalcoholic, you have many categories inside.

You have fast-growing categories, such as water, functional drinks, sports drinks, iced tea, flavored juices or enhanced water. Another category that practically do not grow in the industry, such as carbonated soft drink. So this is what I can say.

Of course, the combination of all, we can say that the nonalcoholic industry grow at a faster rate than the beer industry in the last year, but especially due to these new categories that are developing in Chile.

Regarding the JV in Colombia, I can't provide a specific date to that, but of course, the project itself is a greenfield using the Postobón distribution and networking in Colombia. And this is a very good advantage of the project. So and we'd be certain, once we have local production, it will be profitable. .

Okay. Maybe 1 follow-up question regarding the nonalcoholic beverage business in Chile. I believe you had some land purchased for new plant.

Has there been any progress with capacity expansion?.

Yes. We already have the environmental license approved. And the transportation impact study, that is also approved, with the mitigation that we need to do in the area. And we -- the profit is under implementation starting by the construction of a new distribution center to serve the supermarkets in the Santiago area. So everything is progressing. .

We'll take our next question. .

This is João Soares from Bradesco. I have 2 questions.

First one, if you could, guys, give us more color on the competitive environment in Chile, in a sense that -- I mean, what are you expecting in terms of pricing going forward? Do you think that environment is still favorable enough? I mean, I recognize that you guys managed to raise prices above inflation in the last 12 months.

Do you think that's sustainable going forward? And my second question, it's more on the efficiency gains both ExCCelencia and in International Operations. Is there any more of that efficiency gains left? And is -- can we expect in the second half of the year to really see SG&A in terms of revenues already stable? Those are my questions. .

So regarding your first question, regarding competitive environment in Chile, what I can say is that has been very intense in quarter 2, as it has been along 2016 and also in quarter 1 2017. The good news is that we managed to maintain our overall market share.

And the maintenance of the market share, as we reported, was not at the expense of lower prices, let's say. And as you are pointing out, we grew quarter-on-quarter our prices at 4.1%, so -- which is well above inflation. We expect the competitive environment in a market like Chile, where that is very competitive, will continue to be.

And we trust a lot in our price, mix, packaging strategy, also in the strength of our brands. And the quality of our execution also should surpass in order to compete properly in the market. But we don't -- we expect that the competition in the market will continue.

Regarding your second question, efficiency gains, of course, I think your question was related to International Operations a little bit, as I understand. We'll continue with the ExCCelencia CCU program in all the geographies and businesses.

Of course, in the International Business also, the margin improvement was enhanced by the scale gains that we are experiencing by the higher volumes we have. So we continue the program. We don't make projections on how much this would impact our bottom line or our margins in the future, but the program is still there. .

If I may, just 1 follow-up question on the competitive environment in Chile.

I know it's a bit hard to -- but if you guys could at least rank to us on what would be the focus going forward? Is it going to be more on maintaining this market share? Or are you guys going to -- are you guys willing to lose some market share to maintain margins?.

This is a key question. At the end, we need to have a profitable growth. So that means we will defend our profitability while maintaining or gaining market share, depending on the moment. .

We'll take our next question. .

This is Thiago Duarte with BTG Pactual. I have a question. I appreciate your comments on the outlook for further efficiency gains, but I wanted to focus specifically on the gross margin in Chile. I mean, we saw this quarter for the first time in a while, we saw year-over-year evolution in terms of the gross margin.

I understand that comparison base was probably easier this quarter as opposed to the last 2 quarters.

So just wanted to get your thoughts a little bit on whether you would say, this is -- this could be a turning point in terms of gross margin, or at least we could see -- or we could not see some deterioration going forward? Or you think that the competitive environment, as best as it is, might continue to pressure the gross margin, and thus, we should expect to see operating margin expansion on the SG&A side.

So just to get a sense of the gross margin front. I guess, it helps us understanding a little bit more the competitive environment and the pricing side of the industry. .

First factor is the price has increased, as we announced, and that we did in March of this year our revenue management initiative, but also, cost of sales helped us because as you know, we have some appreciation of the Chilean peso against the dollar with some negative in aluminum prices and sugar prices. But overall, it's a nice equation.

Going forward, I will not make a prediction because it will depend on many factors. In a country like Chile, when inflation is low and competition is high, we never know the prediction on that.

But the strategy, we absolutely need to reemphasize our revenue management initiatives, our efficiency initiatives, while being very competitive in the market, but in times of enhancing our brand preference, our brand entity, our execution. .

That's helpful, I think. And then just a follow-up question.

I know you don't break down the volume growth between the beer and the nonalcoholic segment within the Chile Operating segment, but can you -- just for the sake of comparison, when you use to disclose the operating data between these 2 segments, can you get us a sense of what is the volume or revenue breakdown between these 2 segment nowadays in Chile? I mean, what's the percentage of those volumes that we're seeing from beer.

I mean, round numbers would be very helpful already, just for us to get a sense where the growth in a longer-term period, where the growth is really coming from. If you could get that, would be great. .

Yes. As I already answered and we pointed out, we don't disclose the volumes between categories. What I can make -- and I can -- again, to repeat my comment on the industries, there are industries that grow at a higher rate such as water, enhanced water, juices, functional drink, categories such as carbonated soft drinks that do not grow, practically.

And on the other hand, beer continue to grow, let's say, at a lower rate than in the -- when the economy was better, but continue to have positive growth in the industry. But that is -- but we don't disclose by our volumes by categories. .

We'll take our next question. .

It's Alex Robarts from Citi. I wanted to actually go around the COGS outlook that you have for the back half of the year. And maybe specifically, if you could give us a sense of how you're seeing the grape cost in terms of the recent harvest.

Our read is that there is a chance that the grape prices could have an incremental move in terms of the average cost as we think about the end of the year.

I'm wondering if you're seeing that? And what kind of things could be done to offset that? Is it going to be just about taking more price in the wine business? And on aluminum, we're seeing, really, kind of an 18-month high in those prices.

You typically don't hedge, but I'm wondering if you're seeing some pressure from that input? And might that be something that we need to consider for the second half? So that's the first question. I have 1 last one about M&A, so. .

Okay, Alex. So specifically, I think, you highlighted the challenges we faced in raw materials and specifically in cost of wine. Let me start by cost of wine. After 2 consecutive weak harvest with -- that has been, for different reasons, been bad in terms of production and cost incurred, this has increased a lot our cost of sale per hectoliter of wine.

And I think you are very -- gave us the sense of what we can do and feel we wait for the following harvest next year. So the wine business is under -- margins are under pressure, specifically because of this higher cost of wine. Regarding your question, yes, you are right, the aluminum is what concern us a lot.

We don't hedge, as you know, so we only have inventory on hand, but it's less than 1 month in terms of inventory in aluminum, this also put pressure in cost. Somewhat has been offset in the first semester, this higher aluminum price, by the appreciation of the Chilean peso, so far.

Chilean peso, as you know, has a positive -- the appreciation of the peso positively impact the Chilean Operating segment. Going forward, I think, we were, at the beginning of the year, concerned about sugar but, however, sugar start to decrease prices in the international market. So but we have pressure on pulps cost.

And also, this can have an influence on the margin. But as I said, yes, we saw a less favorable raw materials in that scenario, especially because of aluminum, but so far, has been offset either by efficiencies or the appreciation of the Chilean peso.

As you know, the same in Argentina, where we are seeing especially further devaluation of the Argentine peso against the dollar, and as a consequence, in the translation of our result when you see the translation from Argentinian pesos to Chilean pesos. .

Okay. No, that's helpful. And I guess, just to round out on M&A, I understand that in Argentina, what the SAB Miller sale has done is put into trade the Isenbeck assets.

And I'm wondering, I mean, would that asset be interesting for you? Or is it something that could be possible as far as an acquisition? Any comments on the M&A potential in Argentina would be helpful. .

Yes. Sorry to disappoint you. We don't have any specific comment on this specific topic. .

It appears there are no further questions at this time. I'll turn the conference back to Felipe Dubernet for any closing or additional remarks. .

Thank you to everybody. We have been able to continue the positive trend and we maintain an optimistic view regarding the medium and long-term perspective of our economy. However, we remain cautious regarding short-term macroeconomic challenges, including consumer confidence.

Having said that, in the short term, we reinforce our commitment to revenue management and efficiency initiatives related to our ExCCelencia CCU program, building on our strong brands and effective execution. Thank you to all of you. .

This concludes today's conference. Thank you for your participation. You may now disconnect..