People around the world need to drink, and Chilean beverage provider Compania Cervecerias Unidas (NYSE: CCU), also known as United Breweries, serves several countries in South America with the drinks they want. Coming into Tuesday's third-quarter financial report, United Breweries investors had hoped to see strong revenue and at least modest growth in profits. United Breweries' results instead showed many of the challenges the company faces, although it still managed to do fairly well in some aspects. Let's look more closely at United Breweries' numbers to see what happened and what lies ahead for the beverage maker.
United Breweries again sees earnings take a hit
United Breweries' third-quarter results were mixed in most investors' eyes. Net sales climbed just 1.1% in local-currency terms, which was better than the roughly 1% decline on the top line that many were expecting to see. Net income, however, once again fell sharply from year-ago levels, posting a drop of more than two-fifths in local currency terms and producing earnings of $0.10 per share, missing the $0.15 per share consensus forecast among investors.
Taking a closer look at United Breweries' financials, not all of the company's results were bad. Volume was actually up by 2.5% to 5.47 million hectoliters, and United Breweries was quite pleased at its ability to boost volume even under tough macroeconomic conditions in Chile and Argentina, which are its two largest markets. Volumes climbed even more strongly within Chile, posting a 3.5% increase.
However, currency-related issues continued to hurt United Breweries. The devaluation of the Argentine peso continued to weigh on the beverage maker, and the company's price increases for its products in Argentina haven't been able to rise as quickly as the inflation rate, hurting margin figures. The peso has fallen by nearly two-thirds compared to the Chilean currency, and Argentina's devaluation has been almost as extreme against the U.S. dollar. Put together, the company's EBITDA margin fell by two full percentage points to 14.4%.
Looking more closely at United Breweries' segments, Chilean operations fared the best. Segment revenue climbed almost 11%, with both higher prices and stronger volumes lifting sales. Profit margin fell slightly, but the segment still grew its pre-tax operating income by 6%. By contrast, the international business operating segment was weaker, seeing sales drop 13% despite a 1% rise in volumes, largely because of Argentine currency issues. Price increases weren't able to keep up with 40% inflation in Argentina. In addition, the wine operating segment saw an 8% drop in segment pre-tax operating profit and a 1.8% drop in volume, reflecting extremely weakness in exports. Sales were down 3% overall for the wine segment.
What's next for United Breweries?
CEO Patricio Jottar nevertheless worked hard to reassure investors. "We are confident that we are on the right path in Chile," Jottar said, but "we believe we need additional revenue management efforts in Argentina to keep up with the high levels of inflation." The CEO also pointed to the success of its ExCCelencia CCU program in restructuring its overall business to become more efficient.
One potential sign of trouble is that some of United Breweries' costs are on the rise. The company said that increased expenses related to its wine production are starting to show up now that the first wines of the 2016 harvest have finally started to appear within its sales figures.
In addition, United Breweries' non-operating results have been poor lately. Investments in Colombian operations and a closing of a food plant roughly doubled losses associated with joint ventures compared to the year-ago quarter. Hedges designed to protect against foreign exchange rates also produced losses, reversing substantial gains from a year ago.
United Breweries investors reacted only modestly to the news, sending the stock down 1.35% following the announcement. For its business to recover fully, United Breweries will have to find ways to overcome poor macroeconomic conditions and spur greater consumption going forward.
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