Good day, everyone and welcome to CCU's Third Quarter 2023 Earnings Conference Call on the 9th of November. Today's conference call is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, the Head of Investor Relations. Please go ahead sir..

Welcome, everyone, and thank you for attending CCU's third quarter 2023 conference call. Today with me is Mr. Felipe Dubernet, Chief Financial Officer. You have received a copy of the company's consolidated third quarter 2023 results. Felipe will now review our overall performance and we will then move on to a Q&A session.

Before we begin as usual, 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 the 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 our 20-F form filed with the US 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, Mr. Felipe Dubernet..

Thank you, Claudio, and thank you to you all for joining us today.

During the third quarter 2023, CCU continued making progress to recover financial results and profitability in a challenging and volatile economic environment, the later is strong at the operation at the operational level, increasing consolidated EBITDA by 27.7% and improving 269 basis points EBITDA margin.

The performance of the quarter shows that the path to improve our profitability under the regional plan HerCCUles is moving forward. However, stronger efforts are needed in the context of economic deacceleration and volatility in exchange rates and commodity prices. This drives us to focus on the pillars of HerCCUles.

First, maintain business scale, strengthening revenue manageable efforts, deliver efficiency gains through our transformation program, optimizing CapEx and working capital, focusing on core brands and high-volume margin innovations and continue investing in our brand equity.

In quarter three 2023, our revenues expanded 0.4% explained by 5.1% increase in volumes more than offset by a 5.7% expansion in average prices in Chilean pesos. Lower volumes were caused by weaker consumption in Chile and Argentina and worst weather especially in Chile, while holding market share and a contraction in wine exports.

The higher average prices in Chilean pesos were a consequence of revenue management efforts across all our operating segments. Gross profit jumped at 8.9% and gross margin rose 362 basis points the latter explained by the higher average prices and flat average cost of goods sold versus last year.

The MSD&A expenses increased 2.9% and as a percentage of net sales grew 94 basis points mainly as a consequence of higher marketing activities, the latter to keep enhancing brand equity. In-all, EBITDA reached CLP86,344 million up by 27.7%. Net income dropped 44.9% totalizing a gain of CLP9,499 million. [Technical Difficulty] during the quarter.

And second CLP8,665 million of nonrecurring expenses related with the route -- with the integration of the route to market of our JV in Argentina with our Danone into our beer and cider operation. In terms of cash generation, we delivered another robust quarter.

Thus, as of September 2023 net cash inflow from operating activities totalized CLP205,681 million versus a negative cash inflow of CLP21,871 million. In 2022, while net cash outflow from investment activities reached CLP111,051 million, decreasing from the CLP175,168 million during the same period in 2022.

In addition, we have decreased our portfolio complexity and recorded strong brand equity in [Indiscernible] being key to hold market share in our main categories. In the Chile Operating segment, our top line expanded 5.1% explained by 4.7% decrease in volumes being more than offset by 10.2% growth in average prices.

The higher average prices were explained by a robust revenue management initiatives that we have taken from end of last year. Lower volumes were explained by a challenging consumption environment along with unfavorable weather although in line with the industry as market share remains stable.

Gross profit expanded 17.4% due to top line performance and lower cost pressures. MSD&A expenses were 12.3% higher and as a percentage of net sales grew 237 basis points mostly due to higher marketing activities. In all EBITDA reached CLP52,618 million, growing 38.7% and EBITDA margin increased 320 basis points.

In International Business Operating segment, which includes Argentina, Bolivia, Paraguay and Uruguay, net sales recorded 2.4% contraction in Chilean pesos as a result of 4.3% drop in volumes, partially offset by a 2% increase in average prices in Chilean pesos.

Volumes were negatively impacted by a weaker consumption environment in Argentina, partially compensated by volume expansion in all the other geographies. Gross profit expanded 1.1%.

MSD&A expenses decreased 6% and as a percent of net sales improved 167 basis points due to efficiencies, compensating high inflation and other cost pressures, especially in Argentina. Altogether, EBITDA reached CLP25,785 million, a 30.2% expansion from last year.

The Wine Operating segment continued facing a tough business environment during the quarter. Revenues were down 4.7% mostly explained by a 17.3% contraction in volumes while average prices increased 3.1% due to revenue management in the domestic market, partially compensated with negative mix effects.

The lower volumes was explained by both a 14.4% fall in exports from Chile and a 14.8% drop in the Chile domestic market. Gross profit dropped 8.1% but gross margin improved 296 basis points due to higher average prices and a decrease in cost per liter, due to a more favorable cost of wine.

MSD&A expenses were flat versus last year and as a percentage of net sales increased 429 basis points associated with the lower business scale. In all EBITDA reached CLP11,606 million a 21.2% contraction.

In terms of our main JVs and associated business in Argentina volumes of our water business decreased low double digit mainly impacted by a challenging consumption environment. Also we successfully continued with the route-to-market integration of this business. Finally, in Columbia, volumes contracted low single digit.

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

[Operator Instructions] Our first question comes from Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open..

Thanks, operator. Good morning, Felipe and team. Thanks for the questions. First let me start with volumes. Clearly, the volumes were not excellent in the quarter. When you look at the third quarter of each year for the past few years you've been coming down from a peak of 8.2, I think in 2021 than 7.9 in 2022 now 7.6.

Do you think the post-pandemic correction is done should we be thinking about normalized volumes for hereon out? Or do you foresee that there's a little more pain ahead given what's happening with consumption in Chile?.

Yes, first of all, comparing volumes nowadays volumes with 2021 and maybe 2021 especially is not the right comparison because you have 55 billion of pension funds withdraw in Chile and a boom in consumption. So is worth as 2020 was the year of the pandemic of the lockdowns, 2021 was the party in consumption in Chile, due to the pension fund withdraw.

So I like especially to do a comparison with pre-pandemic volumes. This is from 2019. And total CCU volumes compared to 2019 to 2019 are 14% lower. And compared to third quarter of against third quarter 2019 is 10%. So the first pillar of HerCCUles is to preserve a scale to maintain scale both relative scale and absolute scale.

And I think in this task, we are in this task. Regarding the third quarter volumes, of course, we came from a volume -- a reduction in volume in quarter one of 3.4%, but we were still comparing with a very high comparison in quarter one of 2022, because still we had the effect once again of the pension fund withdrawal.

Then we had an excellent growth in the second quarter growing 4.8 volumes and minus 5%. And coming to Chile, of course, we decreased the volumes in quarter one minus 1.2%, because of the big comparison. So it was a very good volume. In quarter two, we grew 4.7% and now we decreased 4.7%. Of course, I think there is, two factors on that.

The first factor has to do with temperatures. We have had a very rainy which is very good for Chile, as a country of course to have good level of rain, because we have drought conditions. So it's very good. So we had a lot of rain during July, August and the start of the spring and also cold temperatures.

So the decrease in volumes in Chile, are partially explained by temperatures. On the other hand, of course, there is a deceleration in terms of consumption. And this -- we have been always predictive on that because, HerCCUles is about maintaining scale.

So overall, if you look at overall results in Chile, we are maintaining more or less scale in absolute terms, as we are bit practical in our volumes and our volumes in Chile are minus 0.7% less than last year. So overall, maintaining the scale.

And in terms of relative scale, that take into account the market share we are holding even growing in some categories our market share positions. That's the scenery. Going forward, it's difficult to predict.

We will continue to face, I think a very -- at least in the next few quarters maybe this acceleration not further -- I don't see a further deceleration in volumes. I see that we will be able to maintain the scale. I don't see something different given that.

Quarter-on-quarter, it will depend on whether, we depend on temperatures it's impossible to forecast weather. There are some people that said that, we have a very hot summer, but I don't know. I think meteorology is difficult -- meteorology is a difficult science. But in a nutshell is what we see in terms of consumption..

Okay. That's very helpful, Felipe. So you essentially think that you're more or less a new baseline for the company, right? Maybe if I can do a follow-up for costs, after you've had some very good quarters of improvement on costs in recent times. And it seemed that costs didn't provide that much of a tailwind in this quarter.

What's your outlook for the next few quarters?.

Yeah. Look, in terms of cost, I think, we had some good news, but also some bad news. I think we have bad news regarding the non-alcoholic business especially the non-alcoholic business given the sugar prices that are at historical level. And also orange juice. Orange juice the tailwinds are very bad for orange juice and sugar.

In terms of grains it's a question of carryover of inventories. As I said in previous communications of previous conference call last year, we benefit of pre-Ukraine prices for barley. That of course in the global market barley has been reducing the prices.

However, we still have -- in this year now we have benefit a lot of the pre-Ukraine cost level, but because of the opposite season that we have with Europe. But in general in the year we see stable cost -- unit cost and a lot of pressure in non-alcoholic beverages given sugar prices and orange juice..

Okay. That's very clear. I’ll get back in the queue for few more questions if not ask. Thanks a lot Felipe..

Thank you. And have a wonderful day, Felipe. .

Thank you very much. Our next question comes from Thiago Bortoluci from Goldman Sachs. Please go ahead, Thiago..

Yes. Hi. Thanks, Felipe, Claudio for taking the questions and good afternoon everyone. I'll like to follow-up now on SG&A, right? I see your efficiency ratio has marginally deteriorated and it seems that most of the pressure was due to marketing, right? Parallel to this we see Chile demand has been volatile. The company keeps pushing prices higher.

So putting everything in perspective, I am wondering how much more marketing would you need to invest in order to keep scale amidst very volatile demand backdrop, right? And this is the first part of the question.

And the second part of the question, assuming marketing will likely continue to be an important driver for you to keep volumes how much more efficiency the HerCCUles plan could extract in other lines eventually to partially offset this and protect your EBITDA margin? And that's the question. Thank you very much..

Overall, I would say, you are right that the MSD&A increase a little bit in terms of percentage of, let's say. I would say, we recover normal levels of marketing expenses this year compared to 2022. 2022 was a very tough year in terms of results. And one of the pillars of HerCCUles Pillar number six is about protecting or increasing our brand equity.

And this is what is we are having because without brand equity you cannot have a good revenue good revenue management pricing and sustaining volumes. And this is what we -- and we think we are investing for the long, long-term. So adding up also the manufacturing expenses, we are practically flat in terms of expenses as percentage of net sales.

Overall, accumulated to the year. So we will continue to support our brands, while searching efficiencies also taking into account that we have had high levels of inflation at the beginning of the year and now with more control.

So for me for us, we are just recovering the level of marketing that where we should be also the indicator of percentage of net sales, although we have been doing a very robust price efforts has been a little bit diluted by mix effects. So at the end, business effect also contributed at being having an increase on this ratio..

Looks good. Thanks very much, Felipe..

Thank you very much. Our next question comes from Mr. Fernando Olvera, Bank of America..

Hi. Good afternoon, and thanks for taking my question. The first one is related to Chile. Returning back to volumes.

Can you comment what was the performance by channel at beer and soft drinks, if there was a difference? And my second question also in Chile, how are you thinking about your pricing strategy for next year?.

Thank you, Fernando for your question. Regarding the split between beer and nonalcoholic was very similar. We decreased in Chile the volumes around 5.7% -- 4.7%. This was the decrease in volume was -- it was practically the same in nonalcoholic and beer because we are maintaining market share. So it was industry in both.

Temperature affect both categories nonalcoholic and beer and the macro is affecting equally both categories. Also the mix is equally affected in both categories. So overall, that was the explanation.

And the second question was about Claudio?.

About your pricing strategy for next year..

Yeah. We have increased again prices. So we are working on revenue -- always working in revenue management initiatives.

And looking at our promotional rationalization or promotional activities, but also we have increased price now in October in some categories, especially nonalcoholic given the prices that will not improve of some commodities, as I said sugar and orange juices that are putting a lot of pressure in the P&L.

So regarding -- for the next year, we expect at least increased prices with inflation at least..

Great. That's very helpful. Thank you so much, Felipe..

Okay. Thank you very much. Our next question text from Mr. Martin Zicha [ph] from Fundamental Capital.

Regarding prices, should we expect CCU to push increase this north of inflation? Do you see space for that entering 2024?.

Prices will depend on many factors. It will depend on input cost as I said, certainly non-alcoholic we should go beyond inflation given the input cost, especially in sugar that is fairly up. Also for your reference sugar prices are double compared to 2019. So, that is a lot. Oranges are more than double compared to 2019.

So, I -- but it will depend on competition. It will depend on many factors how our brand equity is. But of course if there are opportunities to go beyond inflation we will go forward..

Thank you very much. Our next question comes from Mr. Henrique Brustolin from BTG Pactual. Please go ahead sir..

Hello Felipe and Claudio. Thanks for taking my questions. I have two. One -- the first one you mentioned that you reduced portfolio complexity right in your remarks.

If you could give a little bit more details on that in terms of which categories were -- did that take part?.

Hello, we lost you..

Sorry, I think we lost you for a second.

Do you mind just repeating your question please?.

Yes sure. It's the first one is in terms of the portfolio complexity that means that you wrote that it has been reduced.

So, just wondering if you could give more details in terms of the categories that it happened how relevant this might have been for volumes? And if it's achieving the intended results you planned with it? And the second one on the beer industry in Chile and this is more of a long-term one but we saw a very strong growth in beer volumes in Chile over the past many years.

As you mentioned Felipe volumes they remain well above pre-pandemic.

And when we look at per capita consumption, it's now approaching the levels of other markets that were more mature for beer consumption, right? So, I just wanted to hear a little bit more from you in terms of how you see the beer industry performing in Chile in the long run right if growth should sustain the levels of the past or if it might be closer to peak?.

Yes. Okay. No, thank you for your question Henrique. So, regarding complexity yes the program is about to focus on high volume and high margin SKUs. So, if our SKUs has now the right margin and is not providing enough volume simply we believe so we are deleting about 5% of the SKUs.

And I think this is typically in this program this should not have especially an impact on margins.

And we should run very we should have a lot of discipline especially with innovations to evaluate the innovation if this provides better brand equity is providing better margin? Is this providing better? More high volumes okay you have an entry ticket to enter into the system to launch it.

But if you don't provide strong additional brand equity, it doesn't provide additional volume, and it doesn't provide better margin, we will not launch it. So, that's in nutshell what is about the complexity program. Regarding your question in beer.

Of course, as I mentioned to the first question, our levels of consumption are Hercules is about preserve the scale. And this is what we are doing. Because if I compare the accumulated volumes of the Chile Operating segment, we are talking a very strong volume compared to pre-pandemic volume still.

We think that the growth has slowed down or would be maybe in the next few quarters 0% growth. As I highlighted, quarter three was exceptional because of low temperatures. okay? The weather we cannot do nothing about the weather.

But we think the consumer has reacted in a good way because, do not consider that we have increased in Chile, the prices more than 13%. Of course, we have a mix effect on that and thus the prices, the net prices only increased 10% because three points were lost because of mix effect.

But overall, the consumers there the consumption is there and we are maintaining, the level of consumption that we had last year And also growing against 2019. So, if you took four years 2023 2022 2021 2022, and the base of 2019 we are growing in beer and nonalcoholic exactly the same 19.3% compared to 2019.

So if you divide this by four years, it's more than GDP. So in times of economic acceleration, still our products are adding the wallet of the consumer. So, maybe people will not consume other kind of eateries nondurable. But beverage, still the market is there..

That’s very clear, Felipe. Thank you. .

Thank you very much. We have a question from Mr. Diego Guzman from BTG Pactual Asset Management. Please go ahead, sir.

Hi. Thanks for taking my call – my questions -- I have two questions. You specified that you did price increases in October in nonalcoholic business. So I suppose maybe that this business has a better pricing trend. But you also mentioned that cost outlook is a bit more pressured here.

So mixing these two things, which one of the business, do you think that has a better margin trend in terms of gross margin maybe in the next six months or so.

And the second question, is regarding the nonoperational expense -- it's an operational expense in Argentina, but we see it in the nonoperational results of CLP 8,000 million something around that.

Do you have maybe a payback of this or internal rate of return? Or what is can you explain a little bit deeper, where the economic or implications of this changes..

There is someone that has an open mic. Okay. – Thanks for turning off. So your first question, if I understood was about prices. Yes, as I said, nonalcoholic we have more pressure, because we have more commodity price pressure from nonalcholic commodities such as sugar and especially oranges.

Our beer business has better margins than the non-alcoholic maybe non-alcoholic – beer, although beer is more linked to the US dollar. So we expect that at the end both categories of course require at least inflation but non-alcoholic request more than inflation price increases to compensate this cost pressure.

Regarding the non-recurring expenses in Argentina this is related to the integration of the Danone water business into our sales and distribution network. So this is a non-recurring effect as you highlighted up of approximately $10 million. This is the impact of our P&L is a non-operating because it's – it's a JV that we do not consolidate.

And thus it has an impact in our non-operational results.

Regarding the payback of that is very clear is adding to our network between 5 million hectoliters more or less of volume that certainly will provide us a better scale in Argentina in the future and especially in very difficult times in Argentina it's very good to synergize both distribution networks, the one that we have for beer and the one for water.

This was an acquisition that we did last year. And then now this year we came to a very successful integration of both businesses not only in sales and distribution but also in head office in financial services and other overheads function.

So it would provide us a stronger P&L in Argentina, okay?.

Okay.

Just to be sure you mentioned that both businesses will try to outrun inflation maybe non-alcoholic but which business you see has a better trend in margin normalization beer or non-alcoholic?.

No big difference this year. I think because we had – last year very high aluminum prices on the one hand that affect the beer business very high resin prices that affect the non-alcoholic business, very high mold prices, very – so at the end I think as of today, both business are in the same range of normalization in terms of on average.

The point is looking forward but always is an estimate. But given what we had on the table, which are the commodity costs certainly the non-alcoholic business has more cost pressure than the beer business..

Great. Thank you..

Okay. Thank you very much. Our next question comes from Mr. Carlos Laboy from HSBC Securities. Please go ahead, sir..

Yes. Hello, everybody. I was hoping you could give us more insights into how things are going in Colombia, market share -- not just the volume terms market share, how your brands are doing in the marketplace, et cetera..

Yes. Regarding Colombia, we do have maybe a little reduction in the first semester in terms of market share. However, recovering, especially in the last few months, especially in September.

We have also -- we are being recuperating margin also because of input costs again we have a very tough situation in input costs in 2022 but along the time, it's been recovering this. So still, there are work to do especially in enhancing our brand equity of our brands in Argentina especially.

And also, the other thing that is important improve our sales business there. But the last finance -- on the last quarter, especially in September, in terms of market share are very encouraging..

Thank you..

Okay. Thank you very much. [Operator Instructions] We have a follow-up question from Mr. Felipe Ucros from Scotiabank. Please go ahead, Sir..

Thanks operator. Yes, Felipe, if I could do just one more. Just wondering if you could comment a little bit on what's going on in Wine and what you expect going forward? Obviously, there's been a lot of pain and it's not just pain for CCU, it's industry pain with destocking and wholesale channels around the world.

But just wondering if you could give us your take on how you think the next few quarters will evolve for Wine. Thank you..

Yes. It's an industry pain as you highlighted due to destocking, I will not repeat myself of previous dialogues that we have had on this.

But I would be a little bit more optimist now, because the export because it was especially in exports in the first semester of the year our export volumes from Chile decreased 19%, which was better than industry but it was about 19%. In the third quarter, the reduction was 14% which is better.

But what is good is that now in October we have for the first month in the year increased by mid-single digits our export volumes. So it's the first positive month of the year. So going forward, we expect a recovery in terms of growing since the destocking should stop let's say. On top of that, we are working on brand preference a lot.

We are working in enhancing our relationship with distributors also our commercial offices that we have in the US, in China, and in the UK should enhance our commercial effectiveness in those markets.

So maybe it's too early to call Felipe, but we have had good news in October in terms of also in the third quarter as we decreased less than the first semester okay. And the first positive final in October. Going forward, we should expect finally recover in terms of volume..

Okay. Thank you..

Okay. Thank you. We'll just give another couple of seconds for any additional questions to come in. Okay. It looks like we have no further questions. I'll pass the line back to the management team for the concluding remarks..

Thank you. Thank you to all for attending today. During quarter three 2023 we continue making progress to recover our financial results and profitability in a challenging and volatile economic context.

Our initiatives under HerCCUles are showing positive outcomes through the year allowing us to recover our operational results hold business scale and market share improve margins and strengthening, especially our cash generation.

Nonetheless, we are aware that more efforts are needed to improve profitability further especially when the business scenario will remain challenging. In order to do so we will keep executing our strategy to deliver profitable and sustainable growth. I wish you a wonderful day..

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and have a good day. Goodbye..