Isabel Darrigrandi - Head of Investor Relations Felipe Dubernet - Chief Financial Officer.

Thiago Duarte - BTG Luca Cipiccia - Goldman Sachs.

Good day and welcome to the CCU second quarter 2018 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Isabel Darrigrandi, Head of Investor Relations. Please go ahead..

Thank you. Welcome everyone and thank you for attending CCU's second quarter 2018 conference call. Today with me are Felipe Dubernet, Chief Financial Officer, Nicolas Novoa, Financial Planning and Investor Relations Manager and Carolina Burgos, Investor Relations Senior Analyst.

You have received a copy of the company's consolidated second quarter 2018 results. Felipe will review our overall performance and we will then move on towards Q&A session. Before we begin, please take note of our cautionary statement.

Statements made in this call that it relates 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 risk 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 webpage. It is now my pleasure to introduce Felipe Dubernet..

Thank you Isabel and thank you all for joining us. Hello everyone. In the second quarter of 2018, CCU reported CLP165,926 million in net income, which includes growth from both ongoing operations as well as a one-time gain from the CCU Argentina and ABI transaction executed this quarter.

The transaction primarily consisted in the transfer of a portfolio of brands and cash in exchange for the early termination of the Budweiser license in Argentina.

It is worth highlighting that CCU Argentina's volumes this quarter, including the new brands, continues to deliver double-digit growth in the two months following the close of the transaction which demonstrates the strength of the CCU Argentina been brand portfolio without Budweiser and with the new brands.

Excluding the one-time gain from the transaction, consolidated EBITDA grew 29.6% and net income grew 47%.

Also excluding the one-time gain from the transaction, consolidated EBITDA market increased by 259 basis points from 12.9% to 15.4%, mainly due to greater economy, mainly due to greater economies of scale in our Chile and international operating segments and efficiencies from the ExCCelencia CCU program in all the operating segments.

The net impact of the transaction on CCU consolidated earnings was a one-time gain of CLP153,496 million in net income. The result is explained by the pre-tax cash payment of $306 million and the valuation of $44 million of the brands received by CCU Argentina and other operating and non-operating effects related to the transaction.

As previously reported, the transaction also includes pre-tax payments of $10 million for the production of Budweiser for the first year and up to $28 million per year, for up to three years, depending on the timing and volume of the transition to CCU Argentina of the production and/or commercialization of the brands Iguana, Norte, Baltica, as well as the licensed brands Grolsch and Warsteiner.

In the Chile operating segment, our topline grew 8.3%, driven by volumes that increased 9.2%, which was partially offset by 0.8% lower prices. The high volume growth was due to favorable weather, positive consumer confidence and marketing initiatives, while we slightly increased our overall market share.

The lower average price this quarter was the result of product mix and temporary promotional activities. Gross margin improved by 132 basis points, primarily due to cost efficiencies from the ExCCelencia CCU program and the impact of the 6.6% appreciation of the Chilean peso against the U.S. dollar on our dollar-linked costs.

MSD&A expenses, as a percentage of net sales, decreased by 54 basis points, thanks to efficiencies from the ExCCelencia CCU program and dilution of fixed distribution expenses. As a result, EBITDA grew 16.2%, reaching and the EBITDA margin expanded by 131 basis points, from 18% to 19.3%.

In the international business operating segment, which includes Argentina, Uruguay and Paraguay, we reported topline growth of 11.4%, driven by volumes that increased 29.3% While all three countries continued to report volume growth, Argentina was, once again, the main driver, with sustained double-digit volume growth in each of the three months of the quarter.

The average price in Chilean pesos declined by 13.8%, explained by the 59.3% depreciation of the Argentine peso against the Chilean pesos, given that prices in local currency increased in line with inflation. Our gross margin decreased by 333 basis points, due to the impact of the 48.8% depreciation of the Argentine peso against the U.S.

dollar on our U.S. dollar denominated costs, as well as the 18.1% increase in average aluminum prices in the quarter. Our MSD&A, as a percentage of net sales, saw a significant improvement, primarily due to efficiencies from the ExCCelencia CCU program and fixed expense dilution from increased volumes.

Excluding the one-time gain from the transaction, already mentioned, EBITDA saw a significant growth and therefore a margin expansion from 1.3% to 11.5%. Although we continue to see positive results from our convenience packaging and diversified brand strategy, we remain cautious regarding the macroeconomic outlook in Argentina.

The wine operating segment reported topline growth of 1.8%, explained by 1% higher volumes and 0.7% higher average prices in Chilean peso. The average price in Chilean pesos continued to be pressured by the appreciation of the Chilean peso against the U.S. dollar, which impacted our export revenue.

Gross margin decreased by 686 basis points, from 39.8% to 33%, pressured by the 12.2% higher cost of sales per hectoliter, following the weak 2016 and 2017 harvests. The 2018 harvest yields returned to historical average levels.

The operating segment reported a 27.1% decrease in EBITDA, with an EBITDA margin of 12.6%, a contraction of 499 basis points. In Colombia, where we have a joint venture with Postobon, our portfolio of international beer brands continues to win over new consumers.

We are also making preparations for the introduction of our first mainstream national brand in Columbia, which we will launch once we have completed construction of our new brewery later this year and secure all of the necessary permits. Now, I will be glad to answer any questions you may have..

[Operator Instructions]. We will take our first question..

Hi. Thank you. This is Thiago Duarte with BTG. I have a couple of questions I would like to focus particularly in the international operating segment.

First of all, it's clear that the results there have been improving for several quarters now and I couldn't help but listen to your statement when you say that you were still cautious on the macroeconomic outlook in Argentina.

So I just wanted to understand if you believe that the worsening macroeconomic in the country means that we should expect that some deceleration of volumes and some more pressure on margins? Or it was just a regular cautious and conservative statement by your side or something like that? And the second question would be regarding the volume impact of the exchange of brands.

So I understood initially that the amount of volumes contributing from the brands that you are receiving is similar to the volume that you are giving up by determination of the Budweiser agreement.

So I just wanted to understand that when we look at the 29% volume growth in the international business in the quarter, we are looking on organic figure? Or is there some adjustments to be made in terms of the inorganic contribution from the brands that you guys acquired? Thank you..

Hello Thiago and thank you for your two questions. The ones referring to the macroeconomic outlook for Argentina and the second one regarding the performance of our beer portfolio in Argentina.

As you notice, our international business segment has presented robust volume and EBITDA growth in the last six quarters, as I was saying, primarily due to our operation in Argentina.

During this period of time, we did not see a similar performance in other consumer related sectors in the country as the Argentinean economy has a double digit inflation, another headwind during this time.

As a result, we believe that the beer industry and CCU Argentina, in particular, has seen a growth trend that was not driven by macroeconomic factors. Over the last couple of years, CCU Argentina has seen innovative returns of newest types of beers adding new value piece through brand extensions and therefore the success of a brand like Imperial.

CCU Argentina was also very innovative with packaging and one-way convenience can packaging strategy, which has been very well received by the consumer. As a result of all this innovation, we boost industry growth.

Also Schneider, Imperial, Heineken and Mueller and our other brands in Argentina make up a very strong and diversified beer portfolio which covered the full range of price point and consumer taste. That said, we recognize that the macroeconomic outlook for Argentina has deteriorated recently. I think, of course, you are aware about that.

Consumer confidence also has declined as the Argentine peso has depreciated sharply and interest rates and inflation rates are on the rise. With such a fragile macroeconomic environment, we think it is appropriate to remain cautious regarding how macroeconomic conditions will continue to evolve and impact the consumer.

Despite this, we feel very confident in our beer brand portfolio in Argentina after the transaction and without Budweiser.

In fact, the consumer preference for our brands in Argentina continued to increase, demonstrated by the excellent performance of our brands after the transaction, especially our strategic brands such as Schneider, Imperial, Heineken and Mueller.

And answering you your specific question about organic growth, what I can inform you is that all of these brands deliver strong volume growth on a high comparison base of last year during the two months after the transaction, that is during May and June. Of course, in April also, we experienced a very high growth.

So far, the industry continued to grow. Our portfolio is strong. However, I must say, there is a risk regarding the macroeconomic environment in Argentina.

Okay, Thiago?.

Yes. That was very helpful. Thank you very much..

[Operator Instructions]. We will move on to our next question..

Hi. Good afternoon. This is Luca Cipiccia from Goldman Sachs. I wanted to ask maybe if you can elaborate a bit more on the volume performance in Chile, which was very strong. I think you commented around promotional activity. You commented on the benefit of the weather.

But maybe if you can segment a little bit more for us by category or by channel? And looking ahead as well, what type of momentum you think you will be able to maintain in the second half of the year? Thank you..

Yes. Thank you, Luca and good morning. Thank you. Good morning in Boston. Yes, we have had a very strong quarter in terms of volume, as you noticed. Several factors influenced our volume growth.

First of all, so far the economy has been showing positive signs as reflected in the IMACEC, which was 4.9% in June coming, as you know, from low economic growth in the past years. This quarter, we saw a strong recovery in volume growth compared to the first quarter of this year.

But remember, when we saw a slight decline in first quarter was due to a high comparison base in Q1 of 2017. In the second quarter, answering your question, all three categories grew, beer, nonalcoholic and spirits. For example, beer grew mid-single-digit and nonalcoholic grew low double-digit.

It was really a very good performance in the second quarter with a slight overall market share gains and improvements along with industry growth boosted by favorable weather, as you noticed. We have higher maximum average temperature, especially in May and half of the rain compared to second quarter of last year.

So as you know, we don't do future forecast. So if you take the first semester, our volume grew 2.6% based on a very big quarter in the quarter one where we saw practically flat volumes because of the high comps of last year.

Therefore, in our view or in my view, as long as the economy continues to improve, we can see higher volumes, however probably not at the level of the second quarter, Luca..

Perfect. Clear. Maybe just I think Andina, they had volumes growing 6% or so. And they commented themselves on a market share loss of about 100 basis points, which I would assume form what you say that largely moved to your portfolio.

Maybe if there's any comment there on this sort of market share dynamics, how sustainable or temporarily that might be? Maybe timing of promotional? If there is any other factor that you see has brought some benefit to your business in terms of gaining market share on a sustainable basis?.

Yes. As you know, our overall market share in nonalcoholic has been improving in the last year. And this was due to our very strong position in the non-CSB portfolio, in categories such as water, flavored water, enhanced water, functional drinks, sport drinks, iced tea, juices and mixes.

As you know, we have a very strong position and these are the category that, in the past, continues to grow at a faster rate than CSB. So naturally, we increase our market shares due to that.

Chile is a very competitive market and in a given quarter in a specific category, you can lose or you can gain share, depending on your promotional activities or depending on the reaction of your competition.

So what I would say is that the trend in nonalcoholic is to continue and especially in the categories where we have a more clear and stronger leadership position..

Understood. Thank you. Thanks very much..

[Operator Instructions]. And it appears we have no further questions in the queue. I would like to turn the conference back over to our speakers for any concluding remarks..

Thank you all for attending this teleconference. In summary, this quarter reflect both the both the effected transaction in Argentina as well as continued growth and efficiencies in our ongoing operations.

Over the second half of 2018, CCU will continue to implement our sustainable and profitable growth strategy supported by our strong portfolio of brands, ExCCelencia CCU program, regional and multi-category synergies and focus on innovation, marketing and sales execution. Have a wonderful end of the day and an excellent weekend..

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today..