Good afternoon, everyone, and welcome to CCU's second quarter 2024 earnings presentation call on the 8th of August. Please note that this call is being recorded and all participant lines are on listen-only mode. After the presentation is completed, there'll be an opportunity to ask questions. Without further ado, I would now like to pass the line over to Claudio Las Heras Olivares, Head of Investor Relations at CCU. Please go ahead, sir.
Welcome everyone, and thank you for attending CCU's second quarter 2024 conference call. Today with me are Mr. Patricio Jottar, Chief Executive Officer, Mr. Felipe Dubernet, Chief Financial Officer, Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager, and Carolina Burgos, Senior Investor Relations Analyst. You have received a copy of the company's consolidated second quarter 2024 results. As usual, Patricio will now review our overall performance, and we will then move into a Q&A session. Before we begin, as usual, please take note of our cautionary statement. Statements made in this call that relate to CCU 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 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. Patricio Jottar.
Thank you, Claudio, and thank you all for joining us today. In the second quarter of 2024, CCU's financial results were much weaker than last year, as they were heavily impacted by two effects, a particularly difficult context for demand in Chile and Argentina, and the depreciation of our main local currencies. In Chile, the industries of our core categories, particularly beer, decreased, largely explained by adverse weather conditions, with unusual low temperatures and record rainfall during the quarter, particularly in May and June. In Argentina, we faced a sharp contraction in the economy and in the beer industry associated with a challenging context for consumption. It's important to mention that we maintained overall market share in both countries.
In terms of our main local currencies, the Chilean peso and Argentine peso depreciated 16.8% and 255.1% against the US dollar respectively, increasing our US dollar-denominated costs, impacting our operating results. In this scenario, under our Regional Plan Hercules, further actions in terms of revenue management and costs and expenses control are currently in place. These actions, in a more normalized context of volumes growth, should help us to return to the profitability path. During the second quarter of 2024, our revenues contracted 8.6%, fully explained by 12.7% volume drops, partially compensated by 4.6% higher average prices in Chilean pesos. Lower volumes were largely caused by a weaker demand in Chile and Argentina as I explained before. Average prices were higher due to revenue management initiatives in all operating segments.
Gross profit was down 15.8% and as a percentage of net sales deteriorated by 338 basis points due to higher cost pressures, mainly coming from depreciation of the Chilean peso and the Argentine peso mentioned above. MSD&A expenses expanded 1.7% and as a percentage of net sales deteriorated 464 basis points, mainly as a consequence of lower volumes and its negative impact in fixed expense dilution. In all, EBITDA reached CLP 10,053 million, a 78.7% decrease, and EBITDA margin contracted 629 basis points. Net income reached a loss of CLP 15,888 million.
These figures do not consider the non-recurring gain from the sale of a portion of land in Chile with a favorable effect before taxes of CLP 28,669 million, and after tax at CLP 20,928 million. Including this non-recurring effect, EBITDA totalized CLP 38,722 million, and net income reached a gain of CLP 5,040 million. The following analysis also does not consider these non-recurring events. In the Chile operating segment, top line contracted 5.5%, driven by 8.4% volume drop, partially offset by 3.1% growth in average prices. Volume contraction was caused by weaker demand due to unfavorable weather conditions in the quarter, particularly in the beer business.
Nonetheless, we saw a much better performance in July, being a good sign for volumes looking ahead. Average prices were higher, driven by revenue management efforts in all our categories, partially offset by negative mix effects in the portfolio. In this regard, in July, we implemented additional price actions. Gross margin decreased as a result of higher cost pressures, largely coming from our US dollar-denominated costs. MSD&A expenses were flat due to efficiencies that failed to compensate higher US dollar-denominated expenses. Consequently, EBITDA totalized CLP 26,587 million, contracting 39.7%. In international business operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales recorded 22.1% drop as a result of 27.2% reduction in volumes, partially offset by 7% rise in average prices in Chilean pesos. Weaker volumes were mostly concentrated in Argentina.
On the other hand, Paraguay and Bolivia expanded volumes, while Uruguay dropped due to a high comparison base explained by an uncommon drought in 2023, which boosted packaged water consumption in that year. The better average price in Chilean pesos was driven by revenue management efforts in all the countries, partially offsetting strong cost pressures, mostly coming from the sharp depreciation of the Argentine peso against the US dollar and its impact in US dollar-denominated costs. Consequently, gross margin deteriorated from 46% to 37.5%. MSD&A expenses increased 3.2% and as a percentage of net sales deteriorated, mainly due to the lower business scale in Argentina. Altogether, EBITDA reached a loss of CLP 24,373 million.
The wine operating segment continued in a recovery trend, with revenues expanding 12%, driven by 11.9% higher average prices. Volumes showed a strong recovery in exports from Chile, which expanded 9.1%, while the Chile domestic market was down 5.4%. The better average prices were boosted by the weaker Chilean peso and its favorable impact on export revenues and revenue management initiatives in our domestic markets. Gross profit rose 28.5%, and gross margin improved 511 basis points. MSD&A expenses increased 12.4%, mainly due to higher marketing expenses related to exports, which are denominated in US dollars, and as a percentage of net sales remained flat. In all, EBITDA increased 59.2%. Regarding our main joint ventures and associated business in Colombia, volumes increased mid-teens, driving better financial results.
In Argentina, our water business with Danone recorded a contraction in volumes due to the challenging scenario for consumption. Nonetheless, financial results improved versus last year due to efficiencies from a successful route to market and back-office integration with CCU Argentina. Now, I will be glad to answer any questions you may have.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you have any questions and are dialed in by the telephone, please press star two. That's star two for any questions. You may also ask a voice or a text question if you are dialed in via the web. Okay. We'll now give a moment or so for questions to come in. First question comes from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.
Thanks, operator. Good morning, Patricio, team. Thanks for the space. A few questions on my side. Maybe start with the first one on weather. You discussed in your release, in your remarks that weather had a little bit to do with the poor volume performance in beer and non-alcoholic beverages. In my mind, when it's cold and the consumer drinks less beer and non-alcoholics, maybe the consumer drinks more red wine. The results locally show that in wine, Chile was also negative. Just wondering if you could comment on how those weather effects move the portfolio and whether we should consider that there's more pressure from generalized consumption rather than weather or if you think weather was the bigger effect here. Then I'll do a follow-up. Thank you.
Thank you, Felipe, for your question. Look, if we double-click the volumes in the domestic industry in Chile, indeed we find differences among the different categories. In fact, while we're keeping market share in general terms in the different categories, so the figures of CCU represent the figures of the industry. In the case of beer, so the whole Chilean segment decreased by 8.4% its volumes, as I mentioned before. But there are differences. In the case of beer, the decrease was in the mid-teens. While in the case of non-alcoholic, the decrease was mid or mid-single digits. So something like 5% in the case of non-alcoholic, something like 14% in the case of beer.
As you could see, there are strong difference in both cases, we are keeping market share. You're right, when the weather is not good, wine and spirits benefit from this. In fact, the volumes of spirits decreased by something like 5% and the volumes of wine, domestic market, I mentioned it in my introduction, something like 5% also. May and June were extremely bad in terms of temperature and in terms of rain. In fact, the temperatures in the second quarter, particularly May and June, were the worst in the last 20 years, and rain by far the worst in the last 20 years.
Making a strong effect, particularly in beer, which is very sensitive to temperature and weather, creating an effect also in the other categories, but not as much as in the case of beer. Looking forward, we don't know what is going to happen with weather, but of course, we assume the weather is going to be normal, not hot, not cold. July was a very normal month in terms of temperature and in terms of rain, average on the last 20 years, and volumes resume some growth, not too much, a single digit, 2%, something like this, 2%-3%, which is normal in an economy which is not performing well as the economy of Chile.
We feel comfortable regarding the future, regarding volumes. Again, we think that May and June, particularly in Q2 2024, were extremely extreme because of the conditions I just mentioned.
Great. Thanks for the clarity on that. My second question is on competition. Last quarter, I asked about the rationality in the market and asked if your competitors were moving prices with inflation, and it seemed that they were not moving in the spirits or at least not the same magnitude as CCU. You announced in your release that you increased prices in July. Have you seen your competition follow you this time around?
Look, Felipe, I think that there is a lot of rationality in our markets. It happens that the pressure on direct costs have been tremendous. I mean, if you take a longer period of time, let's say 2019, 2024, our direct costs have increased in beer, in non-alcoholic by 66%, 68%. We have been able to increase price in line with inflation a little bit, a little bit less in the case of beer, a little bit more in the case of non-alcoholic. We have not been able to catch up with the enormous pressure on direct costs. We need to continue making efforts to improve prices to recuperate margins, and we are moving in that direction, and the industry as a whole is moving in this direction.
Okay, that's clear. Any indication that your competitors have followed after your increase in July?
I mean, I prefer not to double-click on the extremely short term, but I would like to say that the industry as a whole is facing the same pressures on direct costs and is moving in the direction of recuperating margin. In fact, it's not just in Chile, it's all over the world. I prefer not to discuss on what is happening today in the market, but I remain positive on our ability to recuperate margins. Let me say this.
Got it. Yeah. It's a very short term to kind of gauge that. Last question on Argentina and shifting to other topics. It's been a few quarters since you left the Coke distribution system in Argentina, and you started using your own. Just wondering if you can give us an idea of how smooth the transition has been and whether you're happy where you are on that distribution today.
Look, we're extremely happy. We made all the integration of the distributions in August, September, October 2023. That was very important for us because as you probably know, 22% of our beer volumes in Argentina were distributed by the Coca-Cola system. We wanted to have control of our 100% of our distribution. By incorporating Danone water products in our distribution, we created enough critical mass to have our own distribution system in all the territory. Today, we do not depend on the distribution of Coca-Cola in the South and in some parts of the North of Argentina. It was very smooth. We reduced a lot of full-time employees. We reduced a lot of distributors.
This is 100% paid in our P&L of 2023, and the results are extremely good and satisfactory. We are very happy on our ability to run a joint distribution, putting together today beer, wine, cider, and water. We're extremely happy on this. In particular, in the case of water, we are running at a positive EBITDA and positive net profit in the year, the water business. We're not consolidating this. We expect to consolidate beginning August or September 2024. I mean, in this month or in next month, we are not consolidating this, but while we consolidate. W E expect to have positive EBITDA and positive net profits, mainly because we transform all the fixed costs of the water operation into variable costs by incorporating it in our platform.
Given that the year 2024 in terms of volumes for the categories in Argentina is extremely poor. I mean, the beer category is decreasing its volumes by 30%, the water business or the water category, same thing. We are keeping, roughly speaking, our market shares there. When volumes decrease by 30%, everything in terms of results becomes very extreme, and this is what we are facing. We don't know when the consumption patterns are going to change in Argentina. Hopefully, in Q4 2024, this is what we expect. We don't know. In the meanwhile, we are capturing, again, all the efficiencies of having just one distribution network.
That's very clear. Thanks so much for that color.
Thank you, Felipe.
Okay, thank you very much. Next question is from Mr. Pedro Seixas from Neuberger Berman. Please go ahead, sir. Hi, Mr. Pedro, your line is open in case you are muted. Okay, we'll come back to Mr. Pedro Seixas in a moment. In the meantime, we'll take Mr. Álvaro García from BTG Pactual. Please go ahead, sir. Your line is open.
Hi, Patricio. Thanks for the space for questions. I really appreciate it. A question on Colombia. The volumes there were quite strong relative to how the economy is doing. I was wondering if you can comment on initiatives in Colombia for that JV. Just to follow up on Argentina, you mentioned share was stable. I was wondering if you can comment if that was volume share, value share. You know, my sense is if you maybe lag on pricing now and gain volume share, you could be in a much better position coming out of the crisis. Any clarity there would be very helpful. Thank you.
Thank you, Alvaro, for your questions. Regarding Colombia, yes, it's true, we are growing our volumes by 50%. We're gaining a little bit of market share. I mean, we make public the results in terms of net profits. EBITDA is being positive year to date, and we expect to have a much better result in the last part of the year because most of the volume comes on October, November, and December. I mean, it's tough. Like I've been tough our project in Colombia, but we're moving in the right direction, and we're very happy on this. Regarding Argentina, yes, I mean, our volumes and so our market share in terms of volumes or in terms of value are in the same direction.
In 2023, our prices will increase by 11% more than inflation, 10 or 11. I mean, when inflation is 200%, it's very difficult to know exactly or to compare exactly your prices with inflation. Let's say that we gain a little bit or we took a little bit of advantage on inflation. In 2024, we are losing six or seven points compared to inflation. If you put together 2023 and 2024, we are at three points above inflation. The industry as a whole is moving in the same direction. It's not a good idea to decrease prices in order not to lose volumes. Because if you do this, at the end of the day, it's going to be extremely difficult to recuperate prices, right?
Yeah.
We expect to move prices in line with inflation and do our best efforts to keep our scale and trust that the economy will resume normality and growth. We expect sooner than later, but it's really very difficult to know when it's going to happen.
Yeah. No, that's helpful. Thank you very much.
Thank you.
Okay, thank you very much. We'll go to Mr. Pedro Seixas, Neuberger Berman. He typed his question. I was wondering if you could elaborate on how much exactly did the FX fluctuation impact the 78% drop in EBITDA. How much of the 78% was to do with the FX depreciation, and how much was to do with the volume decline? Thank you.
See, we have the precise calculation. I will ask Felipe to give you the right figures, Pedro.
Thank you, Pedro, for your question. At the consolidated level, our EBITDA reduced from CLP 47 billion last year's second quarter to CLP 10 billion the second quarter of this year. The difference, CLP 37 billion. Of these, the external effect, as we call, that's the combination of exchange rate in Chile, the Chilean peso depreciation against the US dollar, offset somewhat due to some positive effect on raw material costs in US dollar. This affected in total about CLP 16 billion in a negative direction. This was the hit of our results in quarter two. By exchange rate, somewhat compensated with better prices in PET, aluminum cost and malt cost.
On the other hand, all our operating variables, such as price that was positive, but not enough to compensate the input cost and volume, very negative. We reduced the volume overall at the consolidated level by 13%, and compensated with some efficiencies, especially in logistics. The impact of this operating result was about negative CLP 21 billion. The main causes of the EBITDA decline were due to, first, external effects, about CLP 16 billion, and volume offset somewhat by price and efficiencies of about negative CLP 21 billion. That is the bridge of the EBITDA.
Okay. Thank you very much. Once again, star two for any additional questions. We'll open, Nicolás Donoso , we did notice your question from your line. In case you have a question, your line is open. Nicolás Donoso from Compass Group Asset Management. Okay, so just once again, star two for any additional questions. We'll give a moment or so for any additional questions or any follow-ups. Okay. We have a question from, Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.
Hi. Good morning, and thanks for taking my question. My question is related to cost. If you can share what is your outlook for the remaining of the year now, given that packaging and sugar costs are down, although the Chilean peso has depreciated now versus the US dollar. I have another question, but I'll wait.
Yes. Thank you, Fernando. We'll ask also Felipe to discuss on cost of raw materials and what we expect for the rest of the year.
Thank you, Fernando.
Thanks.
In terms of raw materials, somewhat you are right, the sugar has been softened a little bit, but still is higher than last year, so we continue to be higher. We saw a better outlook in the future the last time. The other big downside that we have in raw materials or higher cost is pulp. You know, orange juices are at a record highest cost, especially due to Brazil. For the rest, it's the same trend that we have. I think they would be stable.
What is more unstable, and it's very difficult to give you an outlook because I don't know, in the last two months, the Chilean peso moved from high 900, let's say close to 1,000, to below 900. This week also was especially volatile in line with the overall markets. It's difficult to predict. I prefer not to give an outlook. We use in our projections 940, but at the end, if you go into Bloomberg, you will find a full array of projections. Also remind that Chile is very sensitive to copper prices. Not only how the financial markets move or how the Fed rates would move going forward, but also on copper prices. Difficult to predict.
This is the reason why we took actions in terms of prices because all the market, all the players, we are facing the same input cost pressures. We think that would continue towards the end of the year. We don't see nothing better than what we have seen in the last quarter. That's important to work on revenue management and price.
Highlight in the press release that recovering profitability is your short-term priority. Can you share what additional measures have you already implemented or are about to implement to recover margins? How do you envision all this recovery on margins?
Oh, yes. Indeed, it's our short-term priority. I mean, long term, we need to move three pillars to build up a good business in the long term. We need to move the pillar or to work in the pillar of profitability growth and sustainability. Of course, we put emphasis on these three pillars, growth, profitability, and sustainability. Having said that, the priority for the next six months and the priority today is profitability, and we're putting all our efforts behind it. Cost expenses, number one, we have our Hercules plan devoted to be much more efficient on one hand, revenue management initiatives on the other.
Control of full-time employees and some efficiencies regarding full-time employees, controlling on SKUs and some efficiencies regarding SKUs and some digital transformation programs, particularly in terms of the way we sell and the way we distribute. If you want us to elaborate more on this, indeed we could do this. Those are the main elements, and we are fully focused on this. That's our first priority for tomorrow, but it's our first priority today, and it was our first priority yesterday, and we're working on this. We expect to improve our financial results in the second half of the year importantly. I mean, this is our number one priority.
Great. Thank you so much.
Okay, thank you very much. Our next question comes from Miss Constanza González from Quest Capital. Please go ahead, ma'am. The line is open.
Good morning, and thank you for the call. I have a question regarding Argentina. Could you clarify about what are you expecting in volumes and prices in the next quarter, or if you are expecting some recovery on the end of this year or the beginning of 2025? Thanks.
Thank you. Thank you, Constanza. Extremely difficult to know exactly. Look, if our volumes were 100 before the beginning of the crisis, and today is 70, we expect to keep in the level of 70 during Q3, and we expect to establish in the level of 85 in Q4. This is just an expectation because we really don't know. If we do this, if we're able to establish in 85, we could make a profitable end of the year. Again, this is what we expect. We don't know exactly. Regarding prices, as I explained before, we expect to move in line with inflation.
Okay. Thank you.
Okay, thank you very much. Next question comes from Miss Sofía Figueroa Ossa from Compass Group. Please go ahead, ma'am.
Yes. Can you hear me?
Yes, please go ahead.
Yes. Yes, please.
Thanks for the call.
Yeah, go ahead.
Yes. Okay, thanks for the call. My question is if you have another non-recurring asset that can be put on sale as the land that we saw this quarter.
No, we expect not to have something like this in the second half of the year.
Okay. Thank you very much.
Thank you.
Okay, thank you very much. Next question comes from Lucas from JP Morgan. Please go ahead, sir. Your line is open.
Hello. I hope you hear me well. My first question is.
Yes. Go ahead.
Yeah. Thank you. My first question is, in light of this, very uncertain scenario for commodities effects, if the company wouldn't be able to reconsider its policy not to hedge commodities effects, how do you see the benefits of, and the cost of hedges versus the, you know, the ability of having a bit more, let's say, predictability on these lines? That's the first question. The second question is just to clarify, third quarter, the company is seeing an improvement in volumes. If you can give us more information on how the premium segments performed in this, bad weather situation in the second quarter, and if you see sort of a premium accelerating more, now in the third quarter versus the whole industry.
In other words, if on top of the price increases you're implementing, if you believe that mix should also be helpful to improve your average price. Thank you.
Thank you, Lucas, for your question. Look, regarding hedging, we have a very clear policy, and we do not hedge raw materials. I mean, because you have two alternatives, or you hedge or you do not hedge. If you do not hedge, you face the spot curve of prices. If you hedge, you face the future curve of prices. If you face the spot price, that's the price. If you want to face the future curve of price, you have to pay the cost of intermediaries. At the end of the day, you lose money.
If you ask me, "Hey, but if you hedge when it's a good idea and if you do not hedge when it's a bad idea", I think if I would be able to do this indeed, we would do it, but we do not have this ability indeed. We are very clear on this. We do not hedge, and we will not hedge. Regarding premium, it's very strange what has happened because let me take the beer category in Chile, for example. Before the pandemic in 2019, premium was 25%-27% of our volumes. After pandemic, premium is in the level of 50%. In the best moment, it was something like 60% in 2021.
When the withdrawals of money from the pension funds, people have a lot of money in their pockets, and the premium jumped to 60%. Now, premium is decreasing to 50%, but still much better than it was in 2019. We have decreased the percentage of premium in the last months from 53% to 50%, 49%, and we expect it to stay in that level. We assume that no major changes are going to happen in the rest of the year.
Okay, thank you very much. Very clear.
Thank you.
Okay, thank you very much. We have a question from Nicole Helm from MetLife Investment Management. Please go ahead, ma'am, your line is open. Please, once again, we have a question from Nicole Helm from MetLife Investment Management. Your line is open in case you have a question. Okay, we'll come back later. Next question. This is a follow-up question from Álvaro García from BTG Pactual. Please go ahead. Your line is open.
Yeah, sorry about that. I meant to ask about COGS, and then I meant to ask about the Chile volumes, but both of those questions have been answered. Thank you very much.
Thank you, Álvaro.
Thank you very much. Okay, good. Thank you. Once again, star two for any final questions. We'll wait for another moment or so for any additional questions to come through. Okay, it looks like we have no further questions at this point. I'll be passing the line back to the management team for the concluding remarks.
Thank you very much. To conclude, I would like to reiterate that our second quarter of 2024 results were very weak and were negatively impacted by a particularly difficult context for demand in Chile and Argentina, and the depreciation of main local currencies, which resulted in higher cost pressures. Given this scenario, we are confident that our multi-category beverage strategy based on focus and synergies should help us to return to the profitability path, which is our short-term priority going forward, as I mentioned during the conference call. Thank you very much for attending.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.