Ladies and gentlemen, good day, and welcome to CCU's Fourth Quarter 2023 earnings conference call on the 28th of February. Today's conference call is being recorded. At this time, I would like to turn the conference call over to Claudio Las Heras, Head of Investor Relations. Please go ahead, sir.
Welcome, everyone, and thank you for attending CCU's fourth quarter 2023 conference call. Today with me are Mr. Felipe Dubernet, Chief Financial Officer, and Mr. Joaquín Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated fourth quarter 2023 results. Felipe will review our overall results, and we will then move on to a Q&A session. Before we begin, 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 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 website. It is now my pleasure to introduce our CFO, Mr. Felipe Dubernet.
Thank you, Claudio, and thank you to all for joining us today. During 2023, we posted a recovery in our operating results and profitability in spite of a volatile business environment, a particularly difficult year for the wine export business and Argentina's macroeconomic conditions. Our consolidated EBITDA in the year grew 6%, and the EBITDA margin improved 159 basis points, driven by our main operating segment, Chile, which expanded EBITDA by 24.8% more than offsetting a 37.4% drop in the wine operating segment and a 16% contraction in international business operating segment, which includes Argentina. Consolidated net income contracted 10.6% versus 2022. The driver for the better operational result was the execution of our regional plan, Hercules, which encompasses six pillars. Number one, maintain business scale. Number two, strengthen revenue management efforts.
Number three, deliver efficiency gains through our transformation program. Number four, optimizing CapEx and working capital. Number five, focusing on core brands and high volume margin innovations. Number six, continue investing in our brand equity. I would like to briefly mention some of the highlights of the year for each pillar. In terms of pillar number one, consolidated volumes in 2023 were 3.4% below last year, mainly driven by lower consumption in Argentina throughout the year, a tough scenario for Chilean wine export, and a deceleration in volumes in Chile during the second semester. Nonetheless, we maintain relative scale by keeping increasing market shares in our main categories.
Pillar number two, we executed revenue management initiatives in all our geographies, especially noticeable in Chile, where average prices increased 7.9% being key to recover margins, offsetting cost and expenses pressures, and negative mix effects. Regarding pillar number three, we were able to deliver efficiency during the year as total expenses, including manufacturing costs for MSD&A as a percentage of net sales, were stable at 47.7% in 2020 through 2022 and 2023. In terms of pillar number four, we recover our cash generation, mainly due to a reduction in working capital versus 2022, CapEx optimization, and a higher EBITDA.
Finally, in line with pillar number five and six, we reduced the number of SKUs allowing us to focus on core brands and profitable innovation, reducing the complexity of our operation, and we posted solid levels of brand equity. From a quarterly perspective, consolidated EBITDA dropped 9.9%, and EBITDA margin was up from 16% to 19.3%. In this quarter, it is important to mention that the sharp devaluation of the Argentine peso against the U.S. dollar generated a material impact in our results in quarter four 2023. The Argentine currency jumped 131%, the exchange rate from ARS 350.50 per dollar as of September 30, 2023 to ARS 808.5 per dollar as of December 31, 2023.
Thus, as Argentina is under hyperinflation accounting, according to the IAS 29, accumulated results in Argentina as of September 30, 2023, are updated to prices and exchange rate levels to the end of the period. This generated a loss in the quarter of CLP 24,018 million in consolidated EBITDA, of which CLP 22,804 million are accounted in international business operating segment, and CLP 1,215 million are accounted in the wine operating segment. Excluding these effects, consolidated EBITDA in the quarter would have expanded 3.4% versus same quarter of last year. In terms of the segment, in the Chile operating segment, top line decreased 2.2% in the last quarter due to a 7.3% contraction in volumes, partially compensated with 5.5% higher average prices.
Lower volumes were mostly related to a weakening demand, which was especially affected by weather conditions. While prices were driven by revenue management initiatives. EBITDA increased 20.9%, and EBITDA margin improved and expanded from 14.2%- 17.5%. In the international operating segment, which includes Argentina, Bolivia, Paraguay, and Uruguay, net sales dropped 90%, mainly as a result of a contraction of 89.4% In average prices in Chilean pesos due to the impact of hyperinflation accounting stated above , as prices in local currency evolved in line with inflation. Volumes contracted 8.3%, fully explained by Argentina, as all the other geographies posted positive volume growth. EBITDA contracted 53.7%.
In the wine operating segment, revenues were down 11.7%, mainly explained by an 8.8% decrease in volumes, driven by a 10.2% decrease in the Chilean domestic market and a 5.6% contraction in exports from Chile. Average prices contracted by 3.1%, also due to the impact of hyperinflation accounting stated above in our wine business in Argentina, and a stronger Chilean peso against the U.S. dollar, which impacted negatively our export revenues. Partially offset by revenue management initiatives in our domestic markets, EBITDA decreased 21.3%. Regarding our main JVs and associated business from a yearly perspective, in Colombia, volumes contracted low single digit in 2023 in a scenario of weaker consumption.
In Argentina, our water business recorded mid single digit growth in volumes, despite the complex economic environment explained by the strength of the brands and a successful go-to-market integration of this business into our operations. Now, I will be glad to answer any question 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 a question, please press star two on your keypad. That's star two on your keypad for any voice questions. We will give a minute or so for any questions to come in. Okay, the first question we have is from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir. Your line is open.
Thanks, operator. Good morning, Felipe, Joaquín, and team. Thanks for the space. My first question is on Argentina. Obviously a messy quarter. All the hyperinflationary accounting effects, you know, kind of muddy up the quarter. How did the quarter start for Argentina in 2024? How are things looking there? Then if I can, I'll do a follow-up. Thanks.
Thank you, Felipe, for your question regarding Argentina. The quarter maintained exactly the same trend as we had in quarter four . We continue to increase prices in line with inflation. Inflation level during January was 20.5% in Argentina. This is public data. We are experiencing industry contraction of, let's say, high single digit, let's say, during January for the time being. It is expected that we will have a lower level of inflation in Argentina in February. Still we do not have official data, but we will continue our revenue management efforts there in order to keep profitability in Argentina.
Great. Before I move to the next question, Felipe, great comments on how the consumer is doing. Let me ask you, do you expect kind of margins to deteriorate as you eventually have to adjust employees in Argentina? Or what type of margin environment do you expect as the year starts?
Look, I will not give you a forward look. In Argentina, all the pillars of Hercules are completely valued, let's say. Of course, we would like to maintain business scale, but it would be difficult given the macro environment. At least relative scale we are maintaining thanks to the strength, because our portfolio ended up last year in a very strong way, let's say. The relative scale would be maintained. The big answer would be, let's say, how much the industry would suffer. The good news is if the government plan works in terms of having lower levels of inflation, maybe we could experience, let's say, some relief in terms of the contraction of the volumes.
All the pillars are towards, let's say, not suffering in profitability terms. Let's say we will continue revenue management efforts there as I pointed out. Efficiencies are keys. A number of projects in several areas, logistic, manufacturing in terms of expense control are very valuable. Also, taking care of the cash is important of working capital, inventory reduction. We have in fact reduced our inventory levels, let's say, to work with less safety in terms of reacting, of course, maintaining flexibility towards the market, but in a more efficient way. Also portfolio standardization is something important. Enhancing, also investing behind returnable packaging also is a way to protect our profitability.
Of course, because all of this should be possible. It needs to be possible, thanks to our high or good levels of brand equity to continue to invest behind the brands. Because without a stronger brand, you don't have it. It would be very difficult to maintain our relative scale.
Very clear. Thanks very much. Thanks very much for that. Maybe if I can do a second one on Chile. Weather seems to have been a factor in the quarter, and I think your peers reported exactly the same thing. I'm wondering how did results look if you kind of didn't have the weather effects? What I mean is, I'm trying to gauge how the consumer is doing if you put aside the weather factor.
Oh, that's very difficult. We need an algorithm for that, you know. Of course, we have some internal algorithms. I think there is a weaker demand itself in the consumer. The consumer is not in the same shape as it used to be in 2021 and beginning of 2022, period. We know that. We have had two bad quarters, quarter three and quarter four in terms of not good weather conditions for selling, you know, refrigerated drinks, let's say. The majority of our portfolio need to be drunk, of course. It was unfavorable in terms of rain, in terms of temperatures.
Factoring out the weather, we decreased 7.3%. I would not attribute 100% to the weather, but I don't have an exact number to provide to you how much the weather would influence on this decrease in volume. Would be difficult. Maybe an indicator could be quarter one , that we have had more stable weather in terms of temperatures, but still it's too early to call the quarter one . January has started in good shape with low single-digit growth, because we have a more normalized weather. Certainly as I mentioned previous conference call, without giving you future forecast, because it's difficult in that because there are several factors, risks and uncertainties, I think low single-digit between mid and low single-digit should be the growth, if you take out the weather, and it's aligned with GDP in Chile.
That's super helpful, especially the comments on January. That helps us a lot, so thanks for that, Felipe. I'll hand it back to you. Thanks.
Thank you very much. We also acknowledge the text question from Mr. Pablo Bello from BTG, which we believe was answered this question in this answer about Argentina. The next voice question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, sir. Your line is open.
Hi. Good morning. Good afternoon. Thanks for taking my questions. I have two. The first one is related to Chile. If you can comment, what is your outlook on costs and how FX effects will play in coming quarters? And if you can share some color on how margins should behave this year, particularly in Chile. That's my first question, and I have a second one. Thanks. First of all, Pablo, I already answered the question regarding Argentina to Felipe. Anyway, thank you for your question. Fernando. Yeah. I would say, of course, you pointed out the main risk that we are facing nowadays in terms of FX. Today, the U.S. dollar is 980, which is much higher than what we had in previous quarter.
We have, you know, a pressure on that in terms of cost. As an example, last year the U.S. dollar where it was the average exchange rate in Chile was CLP 839. Now, we are, let's say, more than CLP 100 more. This is more than 10%. This we need to do at the end is to compensate that in order to have more stable EBITDA margins. This we need to enhance our revenue management efforts, enhance our efficiency efforts also to speed up some projects that we have in terms of efficiencies. Improve mix also is a way to compensate this pressure in terms of the U.S. dollar. This is fully aligned with Hercules. You pointed out that is one of the risks that we are facing.
Okay, great. Felipe. My second question is related to your SKUs reduction. If you can comment about that, to give us an idea of how many SKUs you eliminated in 2023. Any idea of how this favors your profitability and if you are going to continue with the SKU reduction this year? Thank you.
We took out about half of our offers, about 100 SKUs, but this does not represent. It should be in terms of percentage, about 5%. The idea is not reducing all the time you do tackling the tail, let's say, SKU reduction. The incentive of that is to really if we need to launch something of new innovation should be relevant, should have better margins, should improve the brand equity of the category of the portfolio, improve brand equity, deliver higher margins, and also improve volumes. At the end, it's an exercise that we should, it's about discipline on that.
Okay, great. Thank you, Felipe.
Okay, thank you very much. Just a reminder, once again, star two for any additional questions. Our next question comes from Mr. Ulises Bolio from JP Morgan. Please go ahead, sir.
Hi, guys. Thanks so much for the space for questions. A couple of follow-ups on my side. First on the Chile volumes, can you provide a little bit of detail? How was the performance there on the alcoholic versus non-alcoholic? Maybe a double click there on how those more premium beer categories continued to perform there. The other one on FX. Just wanted to hear your thoughts more or less what is kind of being embedded in your budget in terms of FX for the year. What are you thinking in terms of the pricing that you need to do to kind of offset this pressure? Thanks so much.
Yes. Regarding your first question, volumes during quarter four were exactly very similar, both non-alcoholic and beer. No big difference in terms of decrease for both. We are talking about between mid- to high-single-digit, let's say. Because overall decrease in volumes in Chile was 7%, it was very similar across the board. Regarding effects, yeah, we will have a significant effect on this. More or less 70% or 75% are linked to the U.S. dollar of our direct costs, raw material costs, packaging material costs, and also energy costs. We need to do efforts in revenue management, certainly to compensate.
Because every, let's say, 10 pesos of the valuation, more or less is about CLP 2,000 million effect in our EBITDA being compensated by that are already compensated by the export business. This is net of the export that we have in wine, especially. That compensates somewhat at the consolidated level. If you have a 100 pesos, we need to deliver in our PNL, you know, extra between 20-25 thousand million pesos. This is a significant number if you look at the total EBITDA of Chile. Should be a combination of tools, let's say. Revenue management, efficiencies, cost and expense control.
Something in order to have stable margins, let's say.
Okay, thank you. That is very clear. Just on that FX question, are you able to share more or less what you are budgeting in terms of that, like, for your plan for 2024? What kind of FX are you using? Just to have that as a maybe a kind of benchmark of what we should be thinking about in that sense and the impacts on costs.
I'm not an economist, I'm not a meteorologist, so I cannot predict weather, neither exchange rate. I would not like to do a pre-prediction on exchange rate. I can give you current exchange rate, okay? This is the best prediction you have, the current one, and then you could look at Bloomberg to the futures of the Chilean peso. So current exchange rate is CLP 960. I will ask Joaquín now, how are the projections of, you know, the U.S. dollar, how much is. Yeah. It's like that. Today's spot price is CLP 960. Average of last year was CLP 840. So it's a pressure, the exchange rate. It's a pressure that has increased since January. Yes.
Yeah. Yeah, all right, no, I think that's fair enough. Yeah, I was kind of putting you in a tough position there, but understood. Thanks so much for the color there, guys.
Okay. Thank you very much. We have a follow-up question from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir.
Thanks, operator. Since it seems there wasn't anybody else on the queue, I thought I'd take advantage and ask another one, Felipe, so thanks. I know wine is not the largest segment, so it might be unusual to ask about this one. Strategically speaking, it's the segment that seems more challenged in the long term. Volumes have been falling for the larger part of the last few years. I know it's not a CCU problem, it's an industry problem. We've seen it across wine throughout the world. Just wondering if there's a plan to kind of turn around that dynamic or kind of offset that decline in wine consumption. Anything you guys are thinking of to improve performance in that segment?
Yeah. Thank you, Felipe, for your question. Of course, we suffered a terrible 2023 in the wine export industry. Not only Chile, but also Argentina, and saw some numbers yesterday of decrease of Australian exports, Chilean exports. I think there are factors that are related to the carrying inventory units of places that are far from consumption centers. There is something of the economics of the export that has an influence, and even the interest rate that, especially in the U.S., has not reduced yet. The Fed interest rate is still, we are less competitive in terms of carrying inventory costs. So, we experienced this in 2023.
Now, what I would say, we are seeing, you know, some green shoots, let's say, green grass or some embryonic good signals, in terms that we expect, at least in the first quarter to have some growth, in terms of the exports volume. As you pointed out, there is a global industry in terms of volume that is decreased, but there are some tools that we need to look at. Of course, premiumization, something. Innovation, it's a category that needs innovation. We are innovating a lot, especially in the domestic market in Chile, through brand extensions, you know, sweet wine, in order to maintain the scale, especially in the domestic markets. Also, sparkling wine is doing very well.
In the exports are more complicated because you have, as I mentioned, we have some constraints there because it's difficult, global branding. No one has. There are a few that have really global branding in terms of wines, country by country, region by region, so it's different. What we are working in order to make it more profitable and to sustain the scale, even growing in some markets, is through improve our execution. It's all about execution, especially in some key markets. We opened a commercial office in China, also in the U.S. and the U.K. With these three, let's say, new endeavors, we think we would significantly improve the execution in those markets.
That's very clear. Thanks so much for the call.
Okay, thank you. Thank you very much. Our final question is a text question from Mr. Alessandro Conti from Jefferies. Are you planning on initiating cost-cutting initiatives, especially in Chile? Do you see any foreseeable improvement in margins?
Yeah. Cost-cutting seems a little bit aggressive, let's say. I would say cost control to make with the same resources better and more. But of course, our efficiency plan is in place in terms of improving expenses, the key indicator are expenses over revenues and that we need to reduce that in the long term or in the medium term and also this year. We have plans for that, especially expense level. In costs themselves, it depends a lot on the market, the exchange rate, the direct cost of different raw material and packaging materials. Of course, it's a key pillar number three in terms of efficiency, in order to keep the pace with these gains. The priority is one key pillar of Hercules are efficiencies.
Okay, thank you very much for the answer. We see no further questions at this point. I'll pass the line back to the management team for their concluding remarks.
In 2024, we will continue working under our three strategic pillars, growth, profitability, and sustainability, and we'll keep implementing Hercules. We know that the environment in the region will continue to be challenging, especially in Argentina. Nonetheless, we expect to be able to continue on the recovery path of our financial results and profitability. Finally, I would like to thank all our employees. Given their hard work and commitment with CCU, we have been able to navigate challenging years. We will continue working united to sustain a path of profitable and sustainable growth. Thank you, and have a wonderful end of the day.
Okay, thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.