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Operator
Welcome to the Compania Cervecerias Unidas Third Quarter Earnings Web-based Teleconference. This conference is being recorded. At this time, I'll turn the call over to Mr. Patricio Jottar, Chief Executive Officer. Please go ahead, sir.
Patricio Jottar - CEO
Good afternoon. Thank you for attending CCU's Third Quarter 2003 Conference Call. I'm here with Ricardo Reyes, CCU's CFO, and Mr. [Ladro Raul], CCU's [IR] Manager, and [Natalie Polack].
You have all received the company's results for the Third Quarter 2003. On this occasion, I would like to comment on the company's results in each business segment, and also address some new developments presented during the quarter. After these remarks, I will gladly answer the questions you might have.
During the quarter, we have increased our consolidated sales volume by 10.4%, compared with the same period of last year. We had a very good performance in the beer segment in Chile and Argentina, increasing volumes and improving the margins in both countries. This growth, along with the Chilean economy that is clearly showing signs of recovery, and a more stable situation in Argentina, allows us to be optimistic about the future.
Revenues increased 11.5%, showing growth in all our business segments. Operating income grew 41.7%, mainly because of the improvement in the beer segments in Chile and Argentina.
As you know, we answered the fiscal business at the beginning of this year with the brand Ruta Norte. We have had very promising results, reaching a market share of 7.4% in August/September, according to AC Nielson Research. Worth mentioning is that Ruta Norte participates actually only in the mainstream segment, which is 2/3 of the total market. Ruta Norte in this segment has a 12% market share.
At the beginning of October, the second sales force convention named [Ponto Maximo] took place in Santiago, gathering almost 1,000 people, including the sales forces of all our business units. The board members and all the managers of the company were present for this event. All the marketing campaigns for this new high season were represented there, showing more than 70 TV commercials. The Ponto Maximo, or Maximum Points plan launched in the sales force convention, is focused on improving profitability and client satisfaction through a better segmentation execution at the point of sale.
I will turn now to discuss briefly the main issues in each of our business segments. Chilean beer volumes increased by 9.2% during the quarter, despite the 5% price increase carried out in April, improving materially the segment profitability. About 1/3 of this increase is explained by the incorporation of Heineken Lager to CCU's portfolio, which had a very good performance during the quarter.
Operating income increased 73.6%, improving the operating margin 6.77 points, to 20.1%. The implementation of the ACAAC plan the successful introduction of Heineken, better weather in the central region of the country, along with improvement in the economic situation allowed us to reach this achievement. We believe that all these conditions will enable the company to continue growing in the future.
During the quarter, beer in Chile has increased importantly brand equity, measured by first preference. It grew from 86.2% in Quarter 3, 2002, to 94.8% this quarter, mainly explained by the incorporation of Heineken Beer. In October, the company increased beer prices again by 3%. This price increase has not been done in channels, yet, and should be completed by December.
We are very satisfied with the good results obtained in Argentina. Sales volumes grew 19.4%, compared with last year, and prices in [inaudible] have been increasing consistently, reaching $31 per hectoliter in September-61.5% higher than in September, 2002, when prices were $19 per hectoliter-but still lower than the model $50 per hectoliter before devaluation. This good performance was reflected in 16.1% higher revenues-an improvement of 63.3% in operating loss, and in [inaudible] gained from 13.9% in Quarter 3, 2002, to 15.4% in Quarter 3, 2003-mainly explained by Heineken.
Turning to soft drinks, nectars and mineral waters segment. Consolidated volumes increased 4.4%--and average prices decreased 2.1%, due to the absence of price adjustment to inflation. Operating profits decreased 33.5%--however, this quarter represents a small portion of the total year, and we are more optimistic about the full year results.
The nectar segment maintained its good performance, increasing its volume 16.2%. Continuing with development of this category, our soft drink division launched last August the new two different [inaudible] nectar-a mix of strawberry, apple and plum juices-with an excellent reception from consumers.
This was a weak quarter for the wine segment. Its operating results decreased by 50.6%, despite 22.2% growth in volumes. The higher volumes and revenues, are explained by the incorporation of [inaudible] in Argentina, which began consolidating with CCU this year-having previously been in the development stage. Its pro forma results have been very promising, increasing both domestic and export sales volumes.
The operating results have been affected by the higher competition in international markets, and by lower exports to high-margin countries. [Biensempero] has already taken measures to improve its profitability, and to build brand equity in the United States and the United Kingdom.
Finally, I want to commend a recent development. Our soft drink division, ECUSA, signed an agreement with [Luceti], one of the most important food producers in Chile, and a subsidiary of [QuinLlenco], to sell chocolate and candies through the company's sales force. [Luceti] closed an agreement to [inaudible] a [inaudible] of chocolate and candy company, with more than a century of history. This will allow ECUSA to enter the ready-to-eat products business-a $1 B industry. It has a lot of synergies with the $1 B beverage industry-especially in distribution. This agreement will allow ECUSA to participate in this new business segment without doing any investment-keeping the option to buy 50% of [Galat] in three more years, at the acquisition cost plus interest.
Having discussed the highlights of the First Quarter and some recent events, I will be pleased to answer the questions you might have.
Operator
Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key, followed by the digit 1 on your touchtone telephone. If you're on a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. Once again, if you do have a question, please press *1, now.
We'll take our first question from [Jose Horta] of UBS.
Jose Horta - Analyst
Hi. Good morning, Patricio. This agreement with [Luceti]-did you just announce this as we speak, or has there been a press release on that?
Patricio Jottar - CEO
[inaudible]
Jose Horta - Analyst
You just announced it? Can you give a little more detail on the transaction, please?
Patricio Jottar - CEO
Thank you. Thank you, [Jose]. The agreement between [Luceti and Calas], first of all, is subject to due diligence. They have 90 days to close the deal. Then probably, when the final close happens, if it happens, we'll give more details on our distribution agreement. Again, as I said, the two main issues regarding this agreement between [Luceti, Calas and ECUSA] is to have a distribution agreement, and number two, that we have the option to buy 50% of [Calas] in three more years at the acquisition cost plus interest. It means that if we make a very good road in distribution-and we're very optimistic about doing that-we'll increase the volume of the company-we're going to capture it by purchasing the 50% at a very low price. We're making roadways in this operation, because we are going to make just the distribution, which is very complementary. This is the answer to your question.
In marginal terms, this is a very attractive step for us. In rough figures, the beverage industry is a $1 B industry, and ready-to-eat products is a $1 B industry, too. If you put both together, we have a $2 B industry, and the point of sales of both of them remain the same and are completely served by our sales force and by our distribution system. Then for CCU or for [Corsica] to test our abilities in this new industry without committing capital employed is a free option. That is very attractive, and opens for us a very important door for the future.
Ricardo Reyes - CFO
Jose, this is Ricardo. Regarding your question of the press release-it was issued yesterday by [Luceti] addressing this on that issue.
Jose Horta - Analyst
Okay. Then if the idea is to leverage the distribution system of soft drinks in order to do other complementary products, why haven't you done more with PepsiCo's snack business, which is also very complementary? It's basically sold right nearby in the stores.
Patricio Jottar - CEO
Of course, it's some alternative in the future. We have an open discussion with Pepsi, in order to increase the range of business relation in Chile. If we are successful in this experiment, and we're very optimistic about that, to do something together with Frito-Lay would be very attractive for us. We have an open conversation with Pepsi regarding this, at this point.
Jose Horta - Analyst
Do you expect to have anything concrete over the next six months, say?
Patricio Jottar - CEO
I prefer not to commit at this point. Again, this is a first step of ECUSA in a $1 B industry. According to our view, this is the best way for us to take this step. We are committing no capital, we are taking no risks, and it's a free option to pace our abilities. If our ability is high enough to make a good job there, a big door is opening to us. Behind this door there are many things. One of them is the snack business.
Jose Horta - Analyst
Okay. Great; thanks.
Patricio Jottar - CEO
Thank you.
Operator
As a reminder, if you do have a question, please press *1, now. We'll go next to [Catherine Reynold] of [Centender] Investment.
Catherine Reynold - Analyst
Hello Patricio. I had two quick questions. Number one, I noticed that in the [Tule] beer division, depreciation had decreased, and has caused the operating [cost] to increase much more than needed. I was wondering what the reason behind the decrease in depreciation was. My second question was in regards to San Pedro. I realize that part of the margin drop was due to the consolidation of [La Silia], but also the wine from Chile was much more cheaply than the quarter of the year before. I was wondering what measures are being taken to change that.
Patricio Jottar - CEO
Thank you, Catherine, for your two questions. Number one, not just in CCU Chile, but in all our business areas, we have been investing less money than depreciation in the last three years. In 2003, the total Capex is going to be something like 75% of total depreciation. We are working and budgeting the year 2004, and we expect to have this reaching 60% in 2004. In 2002, it was also less than 100%. After four years of making investments less than depreciation, we are beginning to benefit from that. The total level of depreciation is going down, and the total level of capital employed, too. In particular, in the case of beer in Chile-if you remember, in 1999-we built a new plant in Chile-in [Penuco], which increased the total capacity of our beer division, alone. It allows us not to make new investments in capacity to the year 2008 or 2009, again. After that huge investment, which was $72 M, we reduced strongly all our investments in capacity. We are making investments just in coolers and in bottles-mainly in marketing assets-but not in providing assets. Then we expect the depreciations to continue decreasing in the future.
In the case of VSP-of Vina San Pedro-you're absolutely right. The fact of consolidating [Cinqua La Felia] is reducing our margins. But it's not having a real effect on operating results, because through September, the operating results of [Cinqua La Feria] is something like zero, on Chilean [inaudible]. The main real problem that we have in VSP is that we have reduced the average price of our exports. Now the exchange rate is going down, and we're having profitability problems.
We are taking measures regarding mainly three things. Number one, to increase prices again. Number two, to build brand equity in the United States and the United Kingdom. We're focusing all our margin expenditures on the export side of the business in these two countries. Number three, reducing strongly our costs in Chile. I think we'll have a bad fourth quarter, too, but we expect to see the results of this plan in 2004.
Catherine Reynold - Analyst
What kind of measures are being taken to reduce costs in Chile?
Patricio Jottar - CEO
Mainly, the following. In order to protect our volumes and to grow our volumes, we entered into very small countries, number one. Number two, we accepted very small orders. Then the total number of SKUs increased strongly. We are reducing by more than 45% the total SKUs of VSP in the next three months. We are abandoning all those places where we're not making money.
Catherine Reynold - Analyst
Okay. Thank you.
Patricio Jottar - CEO
Thank you, [Catherine].
Operator
As a final reminder, if you do have a question, please press *1, now. We will pause for just a moment.
That is *1, if you do have a question.
Mr. Jottar, it appears we have no further questions. I'll turn the conference back over to you for any additional or closing remarks.
Patricio Jottar - CEO
To conclude, probably I'd like to state that we're optimistic about CCU's future. It's seen economic recovery already in Chile and Argentina. This is having a positive impact on the company's results. We're leveraging on all the things we have done in order to promote volumes, to improve margins, and to reduce costs in [previous] years.
I'd like to thank all of you for attending our conference, and I hope to see you soon.
Operator
That concludes today's conference. We thank you all for your participation. You may disconnect your phones.