[Audio Gap].

Gross margin decreased by 228 basis points mainly due to the higher U.S. dollar-denominated costs from the weaker Chilean peso and the lower average prices. MSD&A expenses as a percentage of net sales deteriorated by 73 basis points, mostly explained by the effect of higher fuel prices on our distribution costs.

As a result, EBITDA decreased 8% and EBITDA margin deteriorated by 320 basis points from 28.2% to 25%. Excluding the negative effect from the depreciation of the Chilean peso against the U.S. dollar, EBITDA would have increased 1.5%. .

The International Business segment -- Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, reported volumes that rose 12%. Excluding Bolivia, volumes grew 5%.

Net sales decreased by 7.6%, explained by the lower average prices in Chilean pesos due to the impact of the 96.7% depreciation of the Argentine pesos against the Chilean peso.

Gross margin contracted from 60.6% to 48.6%, since price increases in line with inflation in local currencies were not yet enough to offset the exchange rate pressure on our U.S. dollar-linked costs. Our MSD&A expenses as a percentage of net sales improved by 85 basis points due to efficiencies.

All-in, EBITDA decreased 33.5% and EBITDA margin deteriorated by 561 basis points from 20% to 14.4%. Excluding the adverse effect of currency fluctuations, EBITDA would have increased 3.4%. .

The Wine Operating segment reported a 6.6% increase in revenue, explained by 7.4% higher average prices in Chilean pesos partially offset by a 0.8% drop in volumes. The higher average prices were explained by the positive effect of the stronger U.S.

dollar against the Chilean peso and Argentine peso on our export revenues and the higher prices in the domestic market.

The segment's gross margin continued to recover this quarter with an improvement of 220 basis points from 31.9% to 34.1%, mainly explained by the aforementioned higher average prices and the slightly lower cost of wine against last year. As a result, EBITDA increased 28.3% and EBITDA margin improved by 194 basis points from 9.5% to 11.4%.

Excluding the favorable impact of the stronger U.S. dollar, EBITDA would have increased 3%. .

In Colombia, where we have a joint venture with Postobón, we launched our local beer brand, Andina, during the month of February with very encouraging results. We're very pleased with this positive start, but we know that this is just the beginning of a long-term venture.

CCU entered Colombia to invigorate the market with focus on consumers' and clients' satisfaction and high-quality product development, to accomplish a profitable position in a dynamic industry.

Andina is produced locally in our 3 million hectoliter brewery in the outskirts of Bogotá, where we'll soon begin to produce our premium beer portfolio, which includes Heineken, Miller Genuine Draft, Tecate and Sol among others. .

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

[Operator Instructions] And we'll go to our first question. .

Fernando Olvera from Bank of America Merrill Lynch. I have 2, if I may. My first question is related to your strategy to integrate external effect.

Can you elaborate more on what are those revenue management initiatives that you mentioned in your initial remarks? And also, where are you identifying efficiencies concerning that Chile on the International Business registered a solid margin expansion in the last 2 years? That's my first question. .

And the second one is related to volumes in Chile. I was wondering if you -- I mean you register a solid increase this quarter.

So first, can you comment what was the performance of beer and nonalcoholic beverages? And second, this is the fourth consecutive quarter that volumes show a very good performance, but comparison will be more demanding in coming quarters.

So how should we expect volumes to be head -- going forward? And can you share your thoughts about the outlook of domestic consumption?.

Thank you, Fernando, for your questions. First of all, regarding our strategy to recover margins, I would like to say that this is not the first time that we suffered on a quarter in relation with the exchange rate in Chile and Argentina.

If you analyze all quarters in the last 10 or 15 years, you will see that we have had many times these kind of effects. And we face these external effects coming from exchange rate or materials in other cases. .

Our strategy has been always the same and still the same. Number one, we keep with our [ dynamism ] in our commercial efforts. We never decreased marketing expenses. We never decreased our efforts in order to grow. Our business has relation with having economies of scale to have volumes, and volumes pay sooner than later.

Of course, in Q1 2019, volumes didn't pay because we increased volumes by 6.6% and we didn't raise our results. But by building volumes long term, we make money because our business is on economies of scale. .

And how we recuperate margins? Through revenue management, number one; and through efficiencies, number two, as you mentioned in your question, and as the external headwinds are not always there.

Today, we have a bad exchange rates, so in [indiscernible], exchange rates in Chile, Argentina, but impacted changes -- or [ it will ] change of -- with the pass of time as it has happened many times. .

Regarding the revenues, we're pushed by larger supermarket chains into many -- into extremely aggressive supermarket promotions, which lasted during January and February. In fact, we've announced that our prices decreased by 0.9% in the quarter. But if you double click in March, our prices in the Chilean segment increased by 1.7%.

So little by little, we're beginning to recuperate prices, which is the first strategy or the first step in order to recuperate margins when you face external headwinds, as it was our case. .

Regarding efficiencies, we have been pushing for efficiencies in -- since 2014, 2015, and we have got very good results. I created a special group in the corporate level of CCU, reporting directly to me, which is pushing permanently, every single process and operation and business in CCU to decrease cost.

And we have got good results, but we have still some processes to optimize and some opportunities. Of course, they're not as strong as they were at the beginning of the program. But good news, we have opportunities to continue doing things, particularly in sales, some things in administrative expenses and some things in logistics.

And we have the plans there, and we expect to continuing -- to continue doing this. .

Having said that, I have to say that the external shocks on exchange rate were very dramatic, particularly in Argentina but also in Chile where the currency situated by more than 10%. And it takes time to recuperate margins when you face something like this.

But our purpose of course is to recuperate margins while we keep and increase the size of our operations and the size of our scale. This is number one. .

Number two, regarding projections of volumes for the following quarters, as you probably know, we never make projections for the quarters to come.

But I could say that we always have been a company which put a lot of focus on increasing volumes and increasing our scale, now because it's the core of our business, and we're continually trying to do this in the future. .

Okay.

And can you -- regarding your volumes in Chile, I mean can you give the -- what was the performance of beer? And what was also the performance of nonalcoholic beverages, please?.

[indiscernible] as you know, we -- I mean we see that our business is a multi-category business. We're not brewers. We're not soft drink producers. We are not wine producers. We're not spirit producers. We produce multi-category beverages. .

And in Chile, our purpose is to go to our clients and to our consumers with the whole portfolio of beverage. And we try to optimize the combined portfolio, on one hand, and to have the best position in each one of the categories. This is the reason why we report volumes on consolidated basis in Chile.

It's not that we do not want to open our information. It has relation with the fact that we see our business as a multi-category business. .

Having said that, beer in Chile grew less than average than -- average in Chile and -- but positive anyway, and nonalcoholic grew more than average. .

And we'll go to our next question. .

This is Luca Cipiccia from Goldman Sachs. A couple of questions as well from my side, one on Argentina. If you maybe can expand on how this type of volatility works. First of all, if you could confirm the volume growth for Argentina, specifically, in the quarter, given that we've seen quite a lot of declines from other companies in the industry.

And secondly, maybe how this volatility is affecting, slowing down or accelerating, the portfolio evolution with the new brands coming in, with the new structure that you have after the transfer of Budweiser. So maybe any comment on are you navigating, maybe from a portfolio standpoint, this type of volatility. .

And then secondly, if you could also spend a little bit of more time on Colombia. You launched the Andina brand. If you can maybe comment on how that is being positioned, how the distribution is being approached in terms of scale and reach as well as how you see that portfolio developing as we move forward. .

Thank you, Luca, for your questions. Regarding Argentina, as I told you in my introduction, we grew our volumes by 5% in International Business, actually now to Bolivia because we consolidated Bolivia beginning in the third quarter. So the base of comparison are not correct. And factoring out Bolivia, we grew our volumes by 5%.

We were almost in -- well, we were not -- in all geographies in Argentina, we're a little bit more than average. So very good results for -- very good results in the quarter, and the portfolio is performing very well. .

We lose Budweiser from our portfolio, and we received those 7 brands, which is a complication. I mean because it's much better to have one brand than 7 brands. But knowing -- I mean doing all the negotiation of the transaction, we're preparing ourselves to focus our portfolio in few brands.

And today, we have many brands here in Argentina, but we have 4 brands where we put 95% of our focus. And those brands are Heineken, Schneider, Miller and Imperial. Heineken is a premium international brand, Imperial is a local domestic premium, Schneider is a mainstream brand and Miller is also an international premium brand from America.

So we have an international premium from the Europe -- from Europe and international premium from the -- from U.S.A. and domestic premium from Argentina and a mainstream brand. And we put 95% of our focus on our portfolio, and this portfolio is doing very well. Before losing Budweiser, we put a lot of focus on the price.

And when we liberated Budweiser, most of that energy was put on this new portfolio, and the results are doing very well. .

Having said that, of course, our volumes are suffering. I mean with we grew more than 5%, which is good. But when you compare to -- March was worse than February and February was worse than January and April going to be worse than March.

And we'll suffer in our volumes as the economy is contracting Argentina, and it's impossible to escape from the situation. We expect it to happen sooner than later.

In the meanwhile, we are putting again our efforts on building the brand equity portfolio, on keeping our volumes as high as possible, volume revenue management and building efficiencies as always. .

In the case of Colombia, as we do not consolidate those figures, we have decided to announce volumes once per year.

And at the end of Q4 2019 (sic) [ 2018 ], we announced that our volumes, which were mainly imported because we have a small microbrewery in Colombia, were a little bit more than 0.5 million hectoliters from the Heineken portfolio, from the Molson Coors portfolio.

We expect to produce in our brewery those brands in the next month in order to reduce direct cost. But in the meanwhile, we're just producing Andina. We launched Andina in the middle of the quarter. Having said that, we increased our volumes in Q1 2019 compared with Q1 2018 by 80%.

Now but you have to consider that this comes mainly from the launch of Andina. .

You have to consider that we launched Andina in the middle of the quarter. The reception from clients and consumers have been very good, but this is a marathon. And we have run the first 50 meters, and we are competing with a strong competitor, which we respect a lot. So it's not going to be easy.

In supermarkets, we have market share every week, and the figures are good. The reception of the brand is good. And in the traditional channel, we have market share just once per month, but the rate of the repurchasing has been very good. And I think that we entered it in the right way in the market. But again, it doesn't mean that the job is done.

There are a lot of -- there is a lot of work and focus in order to keep growing in Colombia, but I think that we are in the right path in that country. .

Very clear. A very quick follow-up on Argentina, just reconciling the numbers. It's fair -- you are gaining market share, though, on a net basis, right? If we consider the fact that your portfolio is growing and we've seen some of your competitor have not -- or has just been showing quite large declines in the last quarter.

So I mean the idea that on a net basis, you're gaining market share, that is correct. .

I mean immediately after the transaction happens in the first -- second quarter 2018, and from the very beginning, our portfolio began to work in a very good way. And we made a jump in market share after that, in May, June, July 2018.

And since then, our market share has been stable, having said to the market share of Q1 2019 as compared with the market share of Q1 2018, which was a quarter previous the transaction. So we're benefiting from that effect. .

But I think that we've gone for our market share, but we do not continue growing it. I mean margin has movements, ups and downs. But we have a new market share, which is better than the market share we have in previous transactions. We're happy on that, but it's -- I would say that it's rather steady or with small variations since then.

And our purpose is to keep this market share to make our portfolio, the brand equity of our portfolio much more valuable and mainly to recuperate profitability. Our focus today in Argentina is not in the market activity. So it's on profitability because the exchange rate shock was amazing, and we need to recuperate margins.

I mean this is our first priority there. .

And we'll go to our next question. .

This is Thiago Duarte with BTG Pactual. Actually, I have 2 questions. The first one is related to pricing in Chile. You mentioned a more promotional activity concentrated in this quarter.

So I just -- wondering if you could be a little bit more granular on that especially in terms of which category that took place and most of all, what the motivations were for that if it was just some effort to gain market share and to push volumes up. And secondly to that, on the pricing side.

Just wondering where you see pricing going throughout the year. As you mentioned in the -- in your comments, there's a significant cost pressure coming from the depreciation of the Chilean peso.

So I was wondering if you think that this more promotional activity could linger in the coming quarters or you expect that to be gradually removed as you push prices higher for -- to offset for the cost environments. So that will be the first question. .

And the second question is actually related to CCU's capital structure. I mean since the follow-on several years ago, CCU moved into a net cash position. Now you have finished a pretty large investment in Colombia, and you remain that cash along with the results that improved over the course of the last years.

So just wondering whether there is the impatience from the management or from the Board to change that.

Is there -- are there plans to change the dividend or accelerate the policy by any chance? Or is there a new growth plan that you might be considering? So it would be nice to how you guys think about that on a -- considering the room that you have in your balance sheet in terms of being very underleveraged right now. .

Thank you, Thiago, for your 2 questions. Look, regarding the promotional activities, but having you following us, you know the economy in Chile and the growth of the Chilean economy in Q1 2019 was poor. So the sales of retailers were poor also, and they want to bring their clients and consumers.

And most of our categories, particularly beer and soft drinks, brings a lot of -- I mean if you make a promotion in those categories, you bring a lot of consumers to buy cheap beer and cheap soft drinks. And when they are there, they buy expensive cheeses or, I don't know, or other products.

And so they are interesting categories for retailers to promote. And then -- and the results of retailers in terms of sales were not very good in Q1 is what we understand. So they were very aggressive on pushing promotions. At the same time, it's because of the exchange rate, tourism from Argentina decreased a lot in Q1 2019.

But tourism from Argentina came every day and thousands of people coming to our airports, and it decreased strongly in 2019. And all of those things affected the supermarkets, and they promoted promotions, which cost money for their men and for us. As I told you before, we want to lead this dynamic and being competitive at the same time. .

And I told you that on March, we increased prices by 1.7% in Chile compared with March 2018, while in Q1 as a whole, we decreased prices by 0.9%. It's difficult to know what is going to happen in the future, and I prefer not to make predictions. But of course, our study has always been to recuperate margins when we lose margin. .

Regarding capital structure, it's a permanent and open discussion in CCU and of course our many positions. What are we going to do with the cash? Do we have new plans? Of course, we're permanently evaluating new plans, but I cannot discuss on this. Do we have a decision on changing our capital structure today? And my answer is no.

There are no news regarding this, which doesn't mean that we could change this in the future. But so far, we're continually looking for new projects of course, and we're continually keeping the idea of have a balance sheet with no debt, positive change in the future. But there are no news regarding this so far. .

Okay. Just to make sure I understood on the pricing side.

So you said it was much more a macro thing, you would say, than a competitive -- or for competitive reasons, if I understood correctly, right?.

Is -- I mean there are many elements there. But our opinion is that it's mostly explained by supermarkets decreasing the volumes and the sales because of the economy, because of the tourism. And promoting -- promotions was in a more intense way than today did in the -- than they did in the past. .

And at the same -- and to explain you, our categories are categories with generate traffic in supermarkets. So they are interesting for promotions. And we think that it's mostly explained by this. Of course, there are the competitive dynamics against our competitors, and the cocktail has a little bit of all these elements.

But we think that the most important ingredient of the cocktail has relation with economy and with supermarket behavior. Nevertheless, the cocktail has also a little bit of -- or more than a little bit of competitive actions. .

And we'll go to our next question. .

This is Richard Dolhun at Westwood. I want to ask about -- you've been -- this is a question you've been talking about here with a couple of people already.

But the Chilean beer competitiveness, the market, I was under the impression until this call today that it would -- that the competition was more driven by competitors, one -- specifically, one large competitor that was increasing brewing capacity in the country and that, that was responsible for a lot of the pricing dynamic that we've been seeing over the past couple of quarters.

But today, what you're telling us, which is very clear, but it sounds like it's more economy and more supermarket-driven. I'm wondering has there been a change in the key driver in the industry or the pressure in the industry or -- because the tone has just -- the story has changed just a little bit from past quarters.

And then I just want to be clear on that, please. .

No. Thank you. Thank you, Richard. I mean we have been facing a strong competitor in beer in Chile. And if you take a very long period of time, we have lost market share and then we stabilized it a little then we lost a little. Now it's been very difficult to compete against [ Cerveceria ] in Chile.

They're very aggressive on promotions and has not changed. .

What I'm saying is that the -- that in Q1 2018 -- '19, excuse me, we had an additional effect, which was the effect that I explained before, that the competed -- and we do not see, let's say, a most aggressive competition in beer than the one we had in Q1 2018, which was very aggressive. I mean it is a [ subject ]. Then my point is it has not changed.

We're facing very aggressive competition from -- in the beer segment, particularly in supermarkets. And we are dealing with this, and we have been able to compete against them. And of course, we do our own promotions. And that's right, we are competing against a giant. And -- but that's not changed. It remains stable. It has not decreased.

What I explained is that it's new in this Q1 2019.

Is it clear now?.

Yes, it is. .

Okay. Thank you. .

And we'll go to our next question. .

Alex Robards from Citi. I have 2 questions as well, and I'm hoping just to go back to Chile a bit and another one on raw materials. .

So I definitely appreciate that you're a total beverage company in Chile. I think it's interesting to note that you talk about the nonalcoholic beverages having -- I guess you used the word above-average growth. And my sense is that this has been a multi-quarter trend.

And I'm just wondering, as you think about your nonalcoholic beverage portfolio, what do you think is kind of somewhat a driver that have been helping you to keep this relatively robust growth? Is it -- can you talk a little bit about [ reformulation ]? Have you been executing on or embracing the reformulation trend? Are you moving kind of more to the low and 0-calorie beverages? And to the extent that you are working around the water business and kind of reducing some of the jug volume, it'd be great if you could give us a sense of what's in store and how that growth has been going more recently in Chile.

.

Secondly, when we think about the gross margin, clearly, there was a big FX impact in this quarter from the dollar and the peso FX issues.

But when we think about the 3 raw materials, I guess in my mind it's a little bit of PET and then malt, what were the year-on-year kind of movements there for those costs in this first quarter, stable, up, down? And just maybe some color on where those raw materials might be evolving this year.

Would we see it more of a -- of net headwind or a tailwind in terms of the dollar cost. That would be great. .

Thank you, Alex, for your question. I will address your question regarding nonalcoholic, and then I will ask Felipe to discuss on raw materials. .

Look, you have to consider that the per capita consumption of alcoholic products and nonalcoholic products have a different trend. I mean if you take a very long period of time in Chile, let's say 10 years, the per capita consumption of alcohol has been rather stable or growing a little bit because to drink alcohol is a habit.

And if you're richer, I mean your habit of drinking alcohol doesn't change. Probably you change from low-priced alcohol to high-priced alcohol, from mainstream to premium, et cetera, et cetera. And then -- and this is what has happened in alcohol. It has been achieved from wine and spirits to beer.

But the total consumption of alcohol has not changed too much. .

Which is not the case of nonalcoholic. In nonalcoholic, if you are richer, you replace tap water by nonalcoholic -- by a nonalcoholic product in a bottle. We have been benefiting from the growth of per capita consumptions. But doing a double [ click ] in nonalcoholic, as you know, soft drinks has not been growing.

But the other categories, there's water, tea, there is juice, it's sport drinks, the caffeine drinks, et cetera, et cetera, has been growing more than soft drinks. And as you know, we lead all those categories as we are #2 in soft drinks.

So we have been benefiting from that trend, and we have been gaining a little bit of market share because of the trend.

Now this is the reason why the performance of nonalcoholic in terms of volumes is better than performance of volume segment in alcoholic products and talk about -- who could predict that it could continue happening in the future?.

Regarding raw material, I will pass the discussion to Felipe. .

Yes. Alex, yes, as you pointed out, we have had a huge exchange rate effect on our USD-denominated raw materials. Practically, 70% of our cost of goods sold are linked to the U.S. dollar. So -- but also, you need to take into consideration buffers, so the devaluation of double-digit devaluation in Chile.

But also remember that last quarter of 2018, also the dollar was in a very high exchange rate. In fact, it closed at CLP 695 at the end of the year. So we carry over some inventory there, very high priced in Chilean pesos due to the U.S. dollar devaluation that started in quarter 4.

So this impacted us more than $7,000 million in the Chile Operating -- excuse me, CLP 7,000 million in the Chile Operating segment. .

Thus, this was a little bit compensated by slightly better raw material cost, but not enough. The raw material cost impact positive was CLP 1,500 million in the Chile Operating segment, was not too much and this was partially due to the carryover of inventory. We are seeing better aluminum prices, as you know.

So last year, we're in a peak of 200 -- $2,200 per ton. The aluminum nowadays is something like $1,800 per ton. So it's better aluminum prices in that. I mean you see maybe for the future, but you never know.

This is something that you find in some analyst that PET and our aluminum will be more stable or slightly declining in terms of plans, have not been asked, as I said at the beginning, to compensate the devaluation of the currency. So we need to go or to reinforce our revenue management efforts to start to recover margins. .

And lastly is wine. Wine cost is helping and will continue to help more in upcoming quarters. And this is thanks that we have had again a normal harvest now in 2019. 2018 also was a normal harvest. .

And we'll go to our next question. .

This is Mohammed Ahmad from FGP. My question, one, a bit longer term, and the other about the supermarket that was discussed a little earlier in the call. .

So with regards to the pressure from the supermarkets on pricing, I'm just wondering, are you seeing more imported product or competition from some third source other than just your main competitor in the market in Chile? Or -- I mean other than that, I don't really see how it would be any -- like any pressure that could be put on you from supermarkets, given they only have 2 choices.

.

Thank you, Mohammed, for your question. You're right. In fact, when it came to rate decreases in Chile, we have one advantage, which is the fact that our raw material is less expensive.

But we have a disadvantage, which is the fact that many in Chile just began to import very cheap brands in 0.5 liter cans coming from many countries of Europe and other countries of America. And they push those products in supermarkets, and they push those products also in our traditional channel.

And in fact, they represented more than 5% of the market in the last 2 to 3 quarters, I mean which is a lot now. So you're totally right. .

Now the exchange rate is much higher, we face high cost of raw material, which is bad news. But probably, we'll face less competition from those importers, which are good news for us. So you're totally right in your vision. .

So we should expect a supermarket-related promotional pressure to ease then because they will have less options. .

Difficult to say. Hopefully. .

Okay. My second question is more longer term. I mean you made a very good point about saying volume will eventually pay. But then you also have to, at any given point in time, trade off volume for margin at times or pricing.

So given that your volumes have been so strong -- and again, we don't exactly know the beer volumes specifically, but I'm assuming your margins have been at least in line, if not -- sorry, market share has been at least in line, if not improving, both in Chile and Argentina.

So would you say that your focus -- sorry?.

No, no, no, excuse me. Please continue. .

So would you say that given the cost inflation that we're seeing, which is FX-driven, we should expect your focus to marginally shift more towards pricing? Now you've already said that March was better.

But should we expect that pricing number to start looking much better for the rest of the year, maybe at the expense of a little bit of a volume growth?.

Okay. But that -- when you -- before doing your question, you said that it was a long-term question, and I will give you a long-term answer. We do not make projections for -- but look, this is what I'm going to -- I'm going to give you a figure which is in our work, what's taken in the presentations we make on investors. .

If you take a long -- very long period of time, let's say, 15 years from 2002 to 2018, our consolidated volumes, compound annual growth rate have grown at a rate of 6.6% and our consolidated net sales at a rate of 10.8%. So in the long term -- and our consolidated EBITDA by 9.7%, on a consolidated income by 12.7%.

So long term, we have been able to build volume, scale and profitability at the same time. And this is -- it has been -- it is and it will continue to be our strategy. Of course, in -- this is in a long -- in a very long period of time, 15 years. .

number one, because we do not make projections; and number two, because we really don't know what is going to happen. I mean we are facing many external forces. But the long-term strategy remains unchanged, which is the same and expressed in the results 2002-2018 that I just mentioned, Mohammed. .

[Operator Instructions] No further questions in queue. I'd like to turn it back over to Patricio Jottar with any additional or closing remarks. .

Yes. So just a final remark, where I would like to summarize this conference call and the results of Q1 in just one concept. And this concept is that CCU was able to maintain solid volume growth on a highly competitive environment while financial results were impacted by significant external headwinds from devaluation of local currencies and others.

In the long term, CCU will continue to secure revenue management initiatives accompanied by further efficiencies to keep delivering profitable and sustainable goals. It has been, it is and will continue being our strategy. .

Thank you very much for attending this conference call. .

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