Compania Cervecerias Unidas SA (CCU) 2003 Q2 法說會逐字稿

(TECHNICAL DIFFICULTY)

(TECHNICAL DIFFICULTY)

90 percent, which is very important because by having more than 90 percent market share in the premium segment, we are in a very good position to get full profitability from this segment. I have to say that when Heineken was in the hands of Quilmes that it was difficult to optimize the profitability of the premium segment because they did not have good discipline regarding prices of Heineken. In fact, during weekends in supermarkets usually, they put Heineken at the parity with Cristal, in the same packages (ph), and most of those sales were extended (ph) by supermarkets on weekends.

In fact, during July of this year, in Chile, we sold as much Heineken as Quilmes sold on July, 2002. But important thing is that our prices were more than 10 percent more than the prices of Quilmes, and something like 15 to 16 percent more than the prices of Quilmes in the first quarter of 2003. The we are keeping the volume, but increasing the prices. And also, it will allow us to increase the price to full of the premium segment, which is going to be very profitable for us. This is our first remark.

Our second remark regarding Heineken -- regarding Heineken (indiscernible) developer is to sell Heineken with a price premium beginning 20 percent and moving to 25 percent, probably in 2004. If you deduct from that the license fee and some additional costs related with Heineken production, the profits coming from Heineken to CCU Chile are similar or even higher than Cristal. Then, it is very good for us to have this brand and our benefits will grow from the very beginning with Heineken.

Considering its market share potential, which was out of your question, I would say the following. The first preference of Heineken, both in Chile, Argentina, moves from 7 to 8 percent. And as you know, market share tends to be similar to first preference if the price of the brand is mainstream. But in that case, if the price of the brand is premium, we expect Heineken to have less than 8 percent market share in the long run -- probably a figure something like 4 to 5 percent is reasonable in four or five more years. This is the case of Chile.

In the case of Argentina, Heineken also fits very good in our portfolio. It brings us 1.3, 1.5 percent of market share, number one. Number two, it brings us the leadership of the premium segment in Argentina -- or the super premium segment in Argentine today is represented by three brands -- Heineken, Corona and Guinness, all of them in our portfolio. It allows us to have a good relation with on-premises (ph) because for any on-premise, it's difficult not to have Heineken or Corona or Guinness, and Quilmes doesn't have a real premium brand today. The business segment is not high in Argentina today because of the economic situation, but our position is very, very strong there. And the price premium in Argentina is also 20, 25 percent (indiscernible) of profitable brand for us.

Just one more thing. In the case of Chile, we made money with Heineken from the very beginning. In the case of Argentina, we did not make money from the very beginning because as we are moving from a very strong distribution, the one of Quilmes, to our weaker distribution, the one we have in Argentina. We have multiplied by two the marketing efforts in the first 12 months in order not to lose volumes. Then we expect to make money with Heineken in Argentina in 12 more months. But finally, as the first preference in Argentina is also 7 to 8 percent, with Heineken we expect the (indiscernible) brand to have a market share of 4 to 5 percent too when the economy resumes growing and the country gets richer.

So, no, that is very helpful. And looking in Chile then, do you thing we can get in this premium segment faster potential growth than the mainstream in the beer industry, or is this something that comes really with the recuperation of Chile -- of the consumption in Chile? Is it secular or is it really -- do we have to kind of wait for some of the recuperation in consumption?

It is a very good question. In fact, I forgot to answer your question relating to Royal Guard, which is our domestic premium brand. In the last 10 years, the premium segment has moved from 3.5 to 4 percent of the industry to almost 8 percent of the industry. That multiplied by 2. It means that it is growing faster than the mainstream segment, and we expect this trend to continue in the future. This is the reason why we are so concerned two years ago when we decreased our market share in the premium segment to something like 40 -- or 38 percent, and it's the reason why we acquired Austral (ph) and we acquired Kuntzman (ph), which are two microbreweries in Chile which were very strong and are very strong in the premium segment in Chile. It's the reason why we are so happy by incorporating Heineken in our portfolio.

We expect the premium segment to grow more than the industry; we expect the premium segment to grow 6 to 7 percent year-after-year, and again, we expect to make it a very profitable segment for CCU. And we have -- there are many brands. I am going to say them ordered by price. If Cristal's 100, we have first of all Royal Guard in 107, which is our domestic (indiscernible) Chilean premium brand. Then we have Paulaner, which is a German premium brand with a premium of 15 percent. Also we have Austral with a 15 percent premium, and the positioning of Australias (ph), the premium of the south of Chile, coming from Puntarenas, which is the southest (ph) brewing operation in the world.

Then we have Heineken, with 25 a percent premium. Heineken is the European premium, a very famous brand. Then we have Budweiser, imported just in the one-way 45 percent premium. And finally, we have the super microbrewery Kuntzman, 65 percent premium. Then we have many brands in order to have one brand in each niche inside the premium segment, and we have a clear strategy for each one of them and we expect again to grow and to make more profitable this segment.

Excellent. Thanks, and this is -- the last thing was really on debt. Thinking about the payout that we're going to be seeing with the dividend, do you think you could give us a sense of where you would like to be at the end of the year in terms of your total debt level?

Yes, when we announced the dividend, we explained that the reason for paying a dividend like this was to optimize the capital structure according our internal estimations and we have discussed it with some external advisers. The optimum debt to capitalization ratio for a company like CCU moves from 25 to 30 percent, and this is the range you would like to have in the future. The dividend is consistent with this situation. Ricardo Reyes will explain more about that.

The amount of the debt that we have now is about the same as we are planning to have by the end of the year, because all the dividend was financed. We are going to renew some debt by October, where we have the maturity of all the previous syndicated loan, and we have a renewal of these for a five-year period. And (indiscernible) we are considering to increase our debit in the range of $50 (ph) million in order to maintain a certain liquidity in our cash position. Nothing more on that.

Thank you very much. That was helpful.

Barbara Angerstein of Celfin Capital.

I was wondering, if you can, give us some more detail on what steps you are taking on Sambero (ph) to improve the exports? And the second question would be about the Disco (ph) business. I assume from the information in the press release that you have yet reached the breakeven point. If that is true, when do you expect to reach that?

Thank you, Barbara, for your two questions. Beginning on Disco, in the original business plan, we are expecting not to make money -- to make a loss during 2003 and to break even in 2004. This is what we expect. The last measurement of Nielsen give us a 6.1 percent market share as I reported in the introduction of this conference call, that this measurement was taken during April and May, and we launched at the end of February. With the results we have gotten in the end of May, during July and beginning August, we think that we are running at a definitely higher level and we expect to have a 9 to 10 percent market share in the next measurement, which we expect to receive in 15 or 20 more days. This in relation with Disco -- we are very with this project.

In relation with VSP, so you know we have four business units inside VSP. Number one is the domestic market in Chile. Number two is the Argentine operations in Calisalia (ph). And number three and four are our two export operations in Chile, one called Vina San Pedro and one called Santa Elena. The problem's just located in Vina San Pedro export, because in (indiscernible) Rosaria (ph), we're breaking even in the first six months of this year and this -- and according to this plan, we are very happy about that.

In the case of the domestic wine business, for the first time in many years we're making money -- more than $1 million in the first semester, and we are very happy with this result. In the case of Santa Elena, export are booming and the results also. In the case of Vina San Pedro, what is happening is that we're having problems just in three markets. If you factor out the result of these three markets, the rest of the portfolio is performing very, very good and we are very happy about that. This is happening in these three markets -- one is the United States and the other one -- I would say maybe in two markets. One is United States and the other one is Sweden, but also probably in Japan, but the most important are United States and Sweden.

In the case of Sweden, we have a clear explanation. We have a very good contract with Dyaned (ph), which is the producer of Absolut, for the next two years, where they have the commitment to buy some amount of wine. And because of an overstock in December of 2002, they have bought from us less than expected in the very beginning of this year, but at the end of the year, they will buy as much wine as we have in the contract. Then, we expect to have a good second semester with them, and we don't have problems, I would say.

In the case of the United States, the situation is more complicated. As I have explained before, we have not been very successful in the United States in increasing our volumes as much as we want, and we are -- we have been trying to understand how to promote and to grow our volumes strongly in this country. Our final conclusion is that we have to build brand equity there, more than we have done in the past. And this is a long-term strategy and we're going to work on that. But again, we expect to solve the problem in the case of Sweden. We have some actions in the case of the United States and we expect a better second semester in this side of the business. Again, Argentina, Santa Elena and domestic side of the business are performing very well. It happens that the export side of the business from San Pedro, we (indiscernible) a very high percentage of our results and our benefits, and of course we have to correct that.

Melissa Byan (ph) of Merrill Lynch.

It's actually Bob Ford (ph), but with respect to the Swedish B&L (ph) volume, is there any risk of this being diverted to another marketplace later in the year?

Excuse me, Bob, is it possible for you to repeat the question? I'm not sure I understood correctly.

Of course. The way I understand the problem with B&L in Sweden is that they have committed to the volume, they're a little bit heavy in the first half of the year. If they continue to be heavy in terms of volume, can they divert their commitment to another marketplace outside of Sweden?

Yes, I understand. Thank you, Bob, for your question. We think that we'll not have problems in Sweden because the depletion has been very good. The sales from V & S to their clients and consumers and the trend in terms -- and the trend of the situation has been very good. Then we have a very recent expectation of having the volumes in the market of Sweden. Of course, we could do things with them in other markets, but if it can't, it will be an additional benefit. But in the case of Sweden itself, we expect to recover.

It's good news. I was also surprised to see the domestic price of (indiscernible) in the second quarter. I was under the impression that the wine industry actually followed the beer price increase, and I was wondering if that is complicating matters for your beer portfolio, given the fact that wine prices at least appear to be much weaker?

Exactly. The trend of wine prices declining is not new. As you know, wine prices have been declining for the last three to four years. The price of the popular wine in Chile today is 40 percent less than it used to be in 1998. And of course, it has affected our ability to grow our volumes in recent years. And as you probably know, we have been working the last two years in the plan ACC (ph), which is a plan to promote the per capita consumption in beer. And we think that we have been able to offset the effects in the decreasing prices of wine by doing many things in the ACC plan. And as you may see, the results in terms of volumes during this year in the beer segment have been good.

We've seen that prices will not decrease more, that because they are very near to the cost of production. If they decrease more, many people will begin to destroy their plantations, and I think that probably not in 2004, but in 2005, they will be to increase again. Then I think that the worst part of this problem is over, and from here to the future, we expect stability and improvements.

Am I right in my perception that initially following the beer price increase, we saw some of the bulk wine manufacturers also raise prices? And it sounds as if they did that only to subsequently reduce prices. Is that correct?

Excuse me, I think that I didn't understand, Bob. Is it possible for you to repeat?

Sure. My perception wasn't following the beer price increase, that many bulk wine producers also followed suit with a similar 5 percent price increase in the quarter. Now I get the impression that that was subsequently rolled back. Is that correct or is that just a misperception on my part?

No, when you say bulk wine, you mean popular wine sold in Chile, no?

Yes, (indiscernible) the wholesale business. I mean the popular wine sold in Chile. And I actually spoke to a couple of your competitors and suggested they were pushing through price increases.

Yes, wine producers have been trying to increase their prices a little by little in the last two months because the decrease was very strong in the first four months of the year, but it has not been easy to do that because of the competition is very strong and it is very price oriented and if we increase price the results are not necessarily good. I would say that the three largest wine -- producers of popular wine, which are Concha y Toro, Santa Rita and San Pedro, we have been investing a lot of money in brand building and in marketing, and trying to increase prices after that in order to support the price increase in brand equity. And I think that little by little, it is beginning to be a successful strategy. In fact, in the last 10 days, we are increasing prices by 5 percent and we expect to keep prices increased and to not lose volumes.

Thank you very much. That's very encouraging.

Jose Yordan of UBS Financial.

I was wondering if you can comment a little bit on the potential brand sales in Argentina? What do you understand to be the current situation there regarding the litigation by -- the litigation to allow producers based in Argentina to bid for those brands? And if so, what would be your level of interest in those brands if you were allowed to bid?

Exactly. We are waiting for a final resolution. We think -- we're optimistic. We think that at the end of the day, current producers will be allowed to buy those assets. And if you analyze the real value of these assets, I would say that there are three elements. Number one, the factory, or the plant itself; number two, the brands; and number 3, the fact of eliminating a new potential competitor -- that's simply for the industry is better that those assets were bought by CCU, for example, instead of being bought by a newcomer, because we make -- we can make a more profitable operation with two competitors than with three competitors. Let's add also (indiscernible).

Going -- for each one of these three elements, regarding factory, factory -- the factory or the plant -- the (indiscernible) of the plant is capacity. I mean, it is perfectly possible to build capacity. And again, the attractive of buying this capacity is not to -- to allow the industry to have available capacity. Then, of course, at a reasonable price it could be interesting for us to take this capacity.

In the case of the brands, as you probably know, they are very (indiscernible) brands. In fact, the first preference of the two brands they are obliged to sell is no more than one percent combined. In fact, the volume of sales of these two brands has been decreasing strongly in the last months because Quilmes has increased the price of these two brands, and if they don't have really brand value, the consumer is not prepared to accept the price increase. Then I think that the brands are not attractive. And (indiscernible) value, of course, to have two competitors or three competitors instead of four is definitely the most attractive element in this eventual transaction. But we are waiting for final resolution.

And if I could follow up on that a little bit, your progress in terms of volumes in Argentina has been pretty good, partly based on easy comparables that are going to get little tougher later this year. But I understand that it has been somewhat through relatively -- through pricing moves that you made a year or so ago that makes your beers relatively cheaper than the competition's. And I was wondering, when do you get to a point where, like Eisenbach (ph) did earlier this year, do you start running against capacity constraints and then you are forced to begin to restore the original, let's say, price relationships that you had before the devaluation? If you can comment on that a little bit, that would be great.

The first (indiscernible) -- look, we have not been cutting prices. It happens that in Argentina, after the AmBev (ph) tragedy two or three years ago, they created a new category which didn't exist in Argentina, which is a category that we call sub-premium, because usually Quilmes had -- we had a premium segment in Argentina, which was represented by Quilmes, by Budweiser, by Eisenbach and by our regional brand. And also, Quilmes had discount brands which no brand value -- (indiscernible), which are the brands they are selling now. And they (indiscernible) a new category, which was a category in the middle of both of them -- more expensive than the discount brands, less expensive than the mainstream, but with a real brand value, because they discounted them to 15 percent, but they invest a lot of money in marketing.

We participate -- we began to participate in this category with Schneider, which used to be a discount brand. But we decided to move Schneider from a discount brand to a sub-premium brand by increasing the price of the Schneider by 10 to 15 percent and by making a lot of investments in marketing. And today, I may say that the first preference of Schneider is very attractive in Argentina and many -- in Buenos Aires and in many other cities in Argentina. And it happens that after the merger between Quilmes and AmBev, they decided to increase the price of the brand (ph) on one hand, and on the other hand, Eisenback went on concentrating capacity.

Then, in a way, we began to compete alone in the the sub-premium category with Schneider, and Schneider is growing a lot. This is number one. And Schneider is a very profitable brand because it's our own brand. We don't pay license fee. The discount regarding Quilmes is not too high and even if we spend the money on marketing, the marketing ratio is relatively low. At the same time, we are having very good results with Budweiser, which is sold at a parity with Quilmes with a very good profitability for us, because we have also invested a lot of money in marketing behind Budweiser, and our relation (indiscernible) has been very successful. Our (indiscernible) brands are performing good too.

Because of all these elements, we will have constraint of capacity in 2004 if we continue with this plan. We are making some investments in order to increase our capacity. Today, our capacity allows us to sell 1.9 million hectolitres and probably (indiscernible) to sell this amount this year. And with a very small amount of money, we are increasing our capacity to sell 2.2, 2.3 million hectolitres. We are going to invest no more than $3 million and we are going to increase the capacity by 0.3 million hectolitres. So then the real cost of our increase is going to be $10 per hectolitre, because we have to add (indiscernible), because we have available capacity in the other areas of the production. Then we expect to grow our volumes to this level -- 2.2, 2.3.

And we expect prices to continue growing, as I said in the beginning of my presentation. Before the evaluation, prices used to be 51 to $53 per hectolitre. In June, 2002, prices were $17 per hectolitre, very low. Today we are at 27. If we are able to increase our prices to 33, $35 per hectolitre by increasing prices, not by devaluating the Argentine currency, of course, because if we re-evaluated the Argentine currency, it will not increase gas prices (indiscernible) costs. If we are able to increase prices by 20 percent in Argentina, it seems to be reasonable -- I think it's going to happen in the next 1.5 or 2 years.

And at the same time we are able to increase our volumes to more than 2 million hectolitres -- which is a thing which I think is going to happen because it is reasonable -- we will be in breakeven according -- more than breakeven according to Chilean GAAP, which would be very good news for us in Argentina. In terms of EBITDA, we're going to generate a positive EBITDA this year of 4 or $5 million. And if the scenario (indiscernible) happens, it means we increase our volumes by 10 or 15 percent. (indiscernible) our prices by 20 percent, again, will increase our EBITDA from 4 to 15 to $16 million and we will more than breakeven in terms of operating results.

This is what we envision for the future in Argentina. Again, we are not thinking in things which are unrealistic, because grow volumes by 10 percent is not realistic and grow prices by 20 percent and have a price of $35 per hectolitre not realistic. A $35 price is still a very low level. Then we are optimistic in Argentina.

Let me get this straight. It seems like these new capacity investments will postpone the constraints from 2004 to '05, maybe '06. But when you talk about increasing prices in real terms, do you mean following the industry or do you mean repricing relative to the competition in order to slow down your growth versus the market and increase profitability? Is that you see in kind of a year or two, or are you just expecting to follow on with the market and leave the relative positionings of the brands to other competitors the same for the forseeable future?

Yes, I mean both but mainly following the industry. We think the industry will grow prices, and of course, we are going to be -- follow if it happens. Quilmes is the leading operator there and they have to take the (indiscernible) to increase price of the industry. And if they don't increase price, it is very difficult for us to do that. This is, I would say, 70 percent of this (indiscernible). The other 30 percent is represented by the fact that as we grow the brand equity of Schneider, we may reduce gap in (ph) prices between Schneider and Quilmes Cristal, which is the mainstream brand of Quilmes. Today, this gap is at process 12 percent, and we think that we can reduce it by some percentage points as we grow the brand equity of the brand. But mainly, by an industry effect. Excuse me?

Just a moment.

Hello, I'm still on here.

Excuse me, and of course, the fact of including Heineken in our portfolio is very good for us in terms of increasing profitability of margins.

Of course. Okay, great.

Mr. Jottar, it appears we have no further questions. At this time, I'll turn the conference back over to you for any additional or closing remarks.

Thank you very much. To conclude, I would like to stress that we are optimistic about CCU's future with the new ownership structure, the entrance into the Disco business, the positive trend in the beer volumes, both in Chile and Argentina, and incorporation to our brand portfolio of Heineken in both countries. I finally would like to thank all of you for attending our conference call and I hope to see you soon.

And that concludes today's conference. Thank you all for your participation. You may now disconnect your line.