Good day, everyone, and welcome to CCU's second quarter 2023 earnings conference call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Claudio Las Heras, Head of Investor Relations. Please go ahead, sir.
Thank you. Welcome, everyone, and thank you for attending CCU's second quarter 2023 conference call. Today with me are Felipe Dubernet, Chief Financial Officer, and Joaquín Trejo, Financial Planning and Investor Relations Manager. You have received a copy of the company's consolidated second quarter 2023 results. Felipe will now review our overall performance, and we will then move on to our Q&A session. Before we begin, please take note of a cautionary statement. A statement 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 risks 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 Mr. Felipe Dubernet.
Thank you, Claudio, and thank you all for joining us today. During the second quarter 2023, CCU posts a strong set of results in a tough economic environment, expanding consolidated volumes by 4.8% and EBITDA by 45.1% from last year. The growth in volumes and EBITDA was 6% and 96.2% respectively when we exclude the wine operating segment, which is facing a particularly challenging scenario due to a sharp decrease in export volumes in line with the Chilean wine industry. The performance of the quarter shows that our efforts and initiatives to recover our profitability framed under the regional plan HerCCUles 2023 are in the right path. However, we are aware that more efforts are needed in order to consolidate this positive trend. Accordingly, looking ahead, we will continue focusing on the six pillars of HerCCUles 2023.
Number one, maintain business scale. Number two, strengthen revenue management efforts. Number three, enhance the CCU transformational program to deliver efficiency gains. Number four, optimize CapEx and working capital. Number five, focus on core brands and high -volume margins and innovations. Number six, continue investing in our brand equity. In quarter two 2023, our revenues expanded 2.8%, boosted by 4.3% rise in volumes, while average prices in Chilean peso contracted 1.9%. The expansion in volumes in the quarter allowed us to be on track to maintain business scale in 2023, in line with pillar number one of HerCCUles. The lower average prices in Chilean peso were largely explained by a negative translation effect in Argentina, although in local currency evolved in line with inflation.
In the Chile operating segment, average price grew high single digits during the quarter in spite of negative mix effects. Gross profit jumped 10.7% and gross margin improved from 40.3% to 43.4%. The latter driven by the higher revenues, but also associated with more favorable costs in relevant packaging materials and the appreciation of the Chilean peso versus the U.S. dollar impacting positively our U.S. dollar denominated cost in line with pillar number two of HerCCUles. MSD&A purchases increased 3.6% versus last year and as a percentage of net sales were practically flat due to efficiencies through all our operating segments, in line with pillar number three of HerCCUles.
In all, EBITDA was up by 45.1%, and net income totalized a loss of CLP 3,943 million versus a negative result of CLP 10,455 million last year. Additionally, in quarter two 2023, we kept delivering a strong cash generation versus 2022. Thus, as of June 2023, net cash inflow from operating activities expanded, and net cash outflow from investing activities decreased during the same period, in line with pillar number four of HerCCUles. In addition, we reduced our portfolio complexity and recorded strong brand preference indicators being key to gain or maintain market share in our main categories in line with pillar number five and number six of HerCCUles.
In summary, consolidated volumes increased 4.8%, driven by a 4.7% expansion in the Chile operating segment and an 8.1% growth in international business operating segment, partially compensated by a 13.4% contraction in the wine operating segment. Net sales were up 2.8% and gross profit increased 10.7%. Consolidated EBITDA reached CLP 47,136 million, a 45.1% increase. EBITDA variation by operating segment was as follows: an 86% jump in our Chile core operating segment, a 74.9% expansion in the international business operating segment, and a contraction of 44.5% in the wine operating segment. Finally, as I said, we have an increase in our results at net income level .
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. We acknowledge all the questions already in the queue. If you have any additional questions, please press star two. That's star two on your keypad and wait for your name to be called. You may also ask a voice or a text question if you have dialed in via the web. We'll now give a moment or so for the questions to come in. Okay, we'll take the first question from Mr. Felipe Ucros from Scotiabank. Please go ahead, sir.
Thanks, operator, and good afternoon, Felipe, Joaquín, and Claudio. Congrats on the results. Really nice rebound from a year ago. I wanted to ask questions about the changes that you think will be implemented with distribution in Argentina, and how it seems that a piece of the portfolio might be leaving from the Coke system. Just wondering if you could give us any details around that, hopefully something like which brands you're planning to remove or what percentage of volumes you're trying to move out of the system. Also I wanted to know what's the plan once you're out of the system. Is it gonna be to create your own distribution network, or did you find another third party that you thought would do a better job than Coke?
Any details you can give us around this would be great.
Thank you Felipe for the question regarding our distribution now, the changes we are doing in our distribution in Argentina. Before, let me give you some background. We used to have our own distribution in the vast majority of the country. Last year, we had the two Coca-Cola bottlers, Arca and Andina, distributing in particular areas of geography such as the north, Arca, and south, plus other regions, the Coca-Cola system. It accounted for more or less 20% of our total volumes. As we said in our press release, the distribution agreement that we had in some regions with the two Coca-Cola bottlers that I already mentioned expire in June.
In those regions, we have implemented a new distribution network. That is a joint distribution of beer and with our recently acquired water business or the participation we have in the JV with Danone in Argentina. Practically, in all the country, this network is implemented. That is combining beer, wine, liquors, but also now the water business. As we said, at the same time, we are negotiating a potential new distribution agreement with Coca-Cola bottlers, which could include some of the brands of our portfolio. That some brands of our portfolio could go with the distribution with the Coca-Cola bottlers. So far, we are still negotiating this potential agreement with them.
In summary, the new distribution network was successfully implemented now in Argentina, and also we went live with all the systems integrating the water business to our systems, the CCU systems at an IT level, in Argentina. Also very successful implementation. Okay, Felipe?
No, that's very clear Felipe. That means that while you're negotiating the distribution with Coca-Cola, you're only distributing in your own system. Is that correct?
No. We are distributing now with our own system. I want to be clear, the Coca-Cola only distribute in particular areas. This agreement finish in end of June, okay? We are negotiating that they could distribute some of our brands of portfolio, maybe a potential agreement. Period.
Okay. That's very clear. The second question I wanted to ask you, just wondering how you feel the temperature of the Chilean consumer is. You know, what's the mood, what's the sentiment for the consumer in on the ground in Chile?
Yeah. We had a good expansion in volumes in Chile during quarter two. As you noticed, a 4.7% growth. As we said, this is still above pre-pandemic figures, okay? So that's—it's a good growth, to be honest. However, the comp of quarter two was easier than the comp of quarter one of last year, because quarter one of last year, as you know, we had the influence of government aid, plus the withdrawal of the pension funds in Chile that boosted consumption. I would say we are happy with the evolution of the industry in order to maintain our business scale.
We were also very clear in saying that the economy has been decelerating, therefore consumption decelerate, especially in the last four quarters, I would say. From quarter two, we've seen growth as our categories are more resilient to the purchasing power or a reduced purchasing power of the consumer. In summary, in terms of the evolution of the consumer, I would say we're confident that we will be able to maintain our business scale in the following quarters.
Mm-hmm. Very clear. Just a follow-up on that Chile question. Is the premium segment of the portfolio now stabilized?
Yeah. What I would say, as we have stated in our release, a portion of our revenue management efforts were offset by the mix of our portfolio, let's say. We reached, as you know, a record in terms of premium mix, especially in beer category, but also in wine, also in liquors, during the end of 2021 and beginning of 2022. I would say this has been stabilized in quarter two with a reduction compared to last year, in which in fact, it's growing more, it's the mainstream brands, especially in beer, but also in wine.
That's all very clear. Thanks a lot for your comments.
Thank you, Felipe. Have a wonderful day.
Thank you very much for the question. Our next question comes from Mr. Fernando Olvera from Bank of America. Please go ahead, sir.
Great. Thank you. Good afternoon, everyone. Thanks for taking my questions. Just to follow up, Felipe, regarding Chile. At the beer segment, I mean, can you comment how your market share behaved during the quarter? And my second question is regarding the international business. If you can comment, what were the main drivers of volume growth and what is your outlook for the second half of the year? Thank you.
Yeah. Regarding the beer, I would say it has been the last quarter we have had a stable market share. You could gain 1.1 month, and then later on reduced by half a point. A stable market share in the last, I would say, six quarters, okay? In beer. Regarding your question about international business, the comps were a little bit especially in Argentina last year, the comps were low. Argentina, in fact, volumes have been a challenge in the last quarters, as the high levels of inflation is affecting consumer purchasing power, let's say.
Mm-hmm.
We had let's say in Uruguay, particularly an extraordinary situation linked to the drought conditions during the summer, that we had a scarcity of public water, let's say, and that boosted our water sales in Uruguay during quarter two. Along with a good performance in Paraguay, growing the volumes high single digits, that is encouraging the results in Paraguay. In the case of Bolivia, very depressed volumes in Bolivia. Going forward, our international segment, as you know, it's the big participation of Argentina, but we think Argentina is in a negative trend in terms of volume.
We could see some decrease quarter-over-quarter in terms of volume in the next looking forward.
Great. Thank you, Felipe.
Okay. Thank you very much. Our next question comes from Mr. Henrique Brustolin from BTG Pactual. Please go ahead, sir, your line is open.
Hi. Hello, Felipe, Joaquín, Claudio. Thanks for taking my question. I would like to explore a little bit more the recovery in profitability in Chile going forward to historical levels. If you could break it down from two different perspectives, the first one coming from costs, right? How should we think about costs in the second half of the year compared to what you deliver now in the first half, especially now that we see maybe, you know, a slightly weaker Chilean peso and overall stable commodity prices. The second one on the pricing front, as you mentioned, pricing has been very strong over the past year, even with some negative mix impact, but we see the results in your net revenues per hectoliter.
The industry performance, you know, even though it's not growing as much, volumes remain pretty strong relative to pre-pandemic. The question I think is how much room do you see for additional price hikes on the back half of the year that could help, you know, bring margins back to those levels from pre-pandemic? Those are the two questions. Thank you.
Thank you. Thank you, Henrique. So far, I think these are the first steps in order to recover our pre-pandemic margins, as you pointed out. We have had a massive. If you compare all the raw materials compared to the pre-pandemic level, let me give you just one example. Aluminum prices in 2019 was $1,800 per ton, and now has stabilized at $2,400 per ton. That's a significant increase between 25%-40%. We had very high aluminum prices right after the Russian invasion to Ukraine, where it jumped up to $3,300 per ton. Now it is stabilized at a lower level, but it's still much higher than the levels we saw. This is a long path in order.
As we said, in this kind of business, you gradually recover margin, and this is what we have been done, especially from quarter four last year, quarter one, and now quarter two. As you pointed out, with the differences in terms of interest rates reduction between the Fed and the Chilean central bank, we have seen an increase of the exchange rate, thus a devaluation of the Chilean peso that certainly impact our costs. If this is maintained, I think maybe it's for sure that this should be considered in our pricing strategy. I would say it will depend on competition, it will depend on many factors for the upcoming months. I don't want to. Let's see about that.
On the other hand, cost perspective, I think raw material are more or less the same. We have high cost pressure in sugar due to supply and demand global conditions, especially between India. There we have pressure. Another good news, as I said, I think in two or three calls, that we have high levels of inventory. As you saw in our cash generation, that we have been reducing our raw materials inventories according to normal levels that we had before the Russian invasion. Also this would help surely into our costs. To be honest, we always will face unstable volatility of exchange rates, and the aim is to gradually recover our pre-pandemic margins. Okay, Henrique?
That's clear. Thanks, Felipe.
Okay, thank you very much. Just a reminder, star two for any additional questions. Our next question is from Martin Zetzsche from Fundamental Capital. The text question: Should we expect cost per liter in Chile to be negative year-over-year, given high comparables in commodities and better FX? Or should we expect it to be positive but below inflation? Thank you.
Thank you, Martin. Should the cost per liter in Chile be negative year-on-year given high comparable? Yes, of course. Especially the third quarter last year, we practically experienced CLP 1,000 per dollar exchange rate. Now it's stabilized. It's stable as the last two weeks, let's say, at CLP 850. There we have some benefits. As I mentioned in the previous question, the cost pressure has eased, except for sugar prices, compared to last year. That's it. Answering your question, it should be negative, especially in quarter three.
Okay, thank you very much. It looks like we have no further questions at this point. I will pass the line to CCU team for the concluding remarks.
During quarter two 2023, we consolidated a recovery path in our financial results in a tough economic environment. The latter was mainly driven by the implementation of HerCCUles 2023, although we are aware that more efforts are needed to keep improving profitability. In order to do so, during the second semester and ahead, we will keep executing our strategy to deliver profitable and sustainable growth. I wish you all a wonderful afternoon and evening.
Thank you very much. This concludes today's conference call. We'll now be closing all lines. Thank you and goodbye.