Compania Cervecerias Unidas SA (CCU) 2004 Q3 法說會逐字稿

I'll turn the call over to Mr. Patricio Jottar, Chief Executive Officer. Please go ahead, sir.

Good afternoon and thank you for attending CCU's Third Quarter 2004 Conference Call. I am here with Ricardo Bartel, CCU's CFO; Luis Eduardo Bravo, CCU's IR Manager, and Analyst, Percy Bustos (phonetic). You have all received the company's results for the third quarter 2004. On this occasion I would like to comment on the company's results in each business segment, and also read some new developments presented during the quarter. After these remarks, I would gladly answer the question you might have.

We are satisfied with this quarter's results. Revenues increased 4.8% and operating results grew 5.8% compared to the same period of last year. We have a very solid performance in most of our businesses. During the quarter, we began the operation of Plan Punto Maximo. This plan consist in the segmentation of our clients in 35 different categories, considering three viable occasion, consumption, size, and potential of the client, and the social economic level of our consumers. For each segment we defined a set for products, packaging, price and the way and cost of serving it. The objectives of this plan are to maximize the satisfaction of our clients and consumers, and the profitability of our clients and the company. To reach these objectives, we developed special system for enhanced skills of the sales force, and we changed their compensation policy in order to pay not just for volume but also for margin and the quality of execution in each point of sale.

I will turn now to discuss briefly the main issues in each of our business segments. Chilean Beer revenues increased by 4.4% during the quarter, explained by a 2.9% higher sales volume and a 2.1% higher average price. The present segment has continued growing, reflected in the higher sales of Heineken, Kunstmann, Royal Austral, and Budweiser brand. After our competitors made public their sales volumes for the second quarter, we estimate that our market share in Beer in Chile, increased from 87% in the second quarter 2003 to 90% in the second quarter 2004. We are very satisfied with the good results obtained in Argentina. Sales volume grew 12.3% compared with third quarter 2003, and price in dollar terms has been has been increasing consistently, reaching $33 per hectoliter during third quarter 2004 compared with $29 per hectoliter a year ago. This good performance was reflected in higher revenues and an improvement of $0.8 million in the operating results. Additionally, market share increased from 14.7% in third quarter 2003, to 15.6% this quarter.

Turning to soft drinks, nectars, and mineral water segment, consolidated volumes increased 4% mainly as a consequence of nectars and mineral water volume increases of 12.8% and 15.3% respectively. The [inaudible] plus the appreciation of the Chilean peso have improved the profitability of this segment, reflected in a 33.2% higher operating results this quarter. Additionally, during the quarter, we also launched Ginger Ale Light and the new Sport Bottle for Gatorade. In the one segment, during the quarter, being there some favorable results to the profitability improving 11.9% its operating results in spite of the 9.5% appreciation of the Chilean peso. The improvement in profitability was due to the program to rationalize cost, expenses and SKUs as well as higher prices in the Chilean domestic market and in dollar terms in export. Last July, Tabalí wines were launched in United Kingdom during the Polo Coronation Cup with the presence of Queen Elizabeth. In Chile Tabali wines were launched in last September. These wines will strengthen the premium wine category of the San Pedro Wine Group.. Additionally, last month Viña San Pedro bought Manquehuito Pop Wine, our very popular and traditional brand in Chile. This brand consists of low alcohol level, [partying] wine with fruit flavors and has 1.4% market share into domestic market according to ASP (phonetic) news [inaudible] that.

As you know we entered the pisco business last year with the brand Ruta Norte in January. We launched the new Ruta Sour, our pisco Ready to Drink, a typical Chilean drink that combines pisco lemonade sugar. We have had very positive results in this industry, reaching a market share of 17.7% according to their last ASP Neilson (phonetic) measurements.

Finally, on the first week of September the second sales force convention means [inaudible] took place in Santiago, gathering almost 3000 people including the sales force of forward business unit, the Board members, our clients and all the administrative personnel of the company where present in this event. All the marketing campaigns for these new high season were presented there, showing more than 60 new TV commercials. This sales convention is [inaudible] Plan Punto Maximo recently, a year ago in the [inaudible] convention, Having discussed the highlights of the third quarter and recent events. I will be pleased to answer the questions you might have.

[Operator Instructions]. And we do have a question from Joaquin Lopez, Joaquin Lopez is with Deutsche Bank.

Good morning gentlemen. My question relates to the increase in marketing expense we saw in the Chile in beer business during the quarter. Can you give us an idea of what we can expect for fourth quarter and 2005?

Thank you Joaquin for your question. We have been strengthening our portfolio of brands in Chile in order to have our a better position to face the eventual competition and [inaudible] vis-à-vis finally by the other 50% of if we buy the other 50% of [inaudible]. In order to do that we have step in not only of position in Cristal, which is our main brand and we spent a very strong brand. But also behind [inaudible] this or which is a brand or be a very popular among young people and also in the premiums segment where we have a today split of brands competing and [having] all the different [mix] [peaks] in the beer business. Putting all together, we expect to increase our marketing rates by 1% in 2005 compared to 2004, one point, from a 10% to 11% of our sales. For last quarter [inaudible] not to make projection.

Thank you so much and just a question would you expect these marketing increases to translate into further market share gains in 2005, specially, I guess on the premium segment?

Today we have 90% market share in the beer businesses and the beer business is very difficult to increase its market share I mean the premium segment we have 92%-93% market share again its very difficult to grow that I mean our real objective more than growing market base to grow -- is to grow, number one the per capita consumption of beer, which is very low and number two the percentage [forward] sales we represented by premium beer. 5 years ago the percent forward sales were percent premiums was 2% or 2.5% of the sale or 8.5% and we expect to grow it in the future to capture more margins from that.

Thank you very much that’s very helpful.

Thank you your next question is from Tobias Stingelin with J. P. Morgan.

Yes I don't [inaudible] [before] you should be [inaudible] I just joined the call so and sorry for that, but I wonder if you can provide any of the debate the potential feel from the height of bush speak if you will be involved in a marketing [trip] in our old territory to the investors if you have any clue why they are deciding to make the issuance basically in the local market. That’s the first question then the second question I would like to at see if you can give us a sense about cost of goods sold for a beer and the trend are going forward. We were somehow surprised like cost in the second quarter -- sorry in the third quarter and the final question I would like to have better understanding about the sequential decline in price in Argentina?

Thank you, Tobias. Regarding your first -- regarding your first question, this is [inaudible] which is decided 100% by AB and they have decided to sell -- they have decided not to continue with the secondary offering that we are working in and they have decided to sell even the Chilean market. They know the process -- they know we finally have gone to sell or not and when they are going to sell. Then I cannot give you information regarding this point. The only thing I could tell to you is that we have a very good relation with them. We like to have Budweiser in Chile and Argentina because these brands strengthen our portfolio in both countries and we will continue working with both brands in -- so with the Budweiser brand both in Chile and Argentina is they finally sell their stake in CCU. Regarding your third question before the deep evaluation in Argentina, the price per hectoliter was $54 -- $55 per hectoliter in Argentina, which is a very normal or regular price in dollar terms in the beer business. After evaluation in May of 2002, five months after the evaluation visit the evaluation happened in December 2001-January 2002, the price per hectoliter was $16 from $53 to $16 and of course it is very difficult to make money in a scenario like this. Today the price is 33 and we expect it to grow in the future and to arrive again to the level of 53 in 5 or 6 more years and we expect it to grow constantly a year-after-year. I didn’t understand the second question.

Yeah. Are you go back -- for just a second, just two comments for the first and related to Anheuser-Busch [deep] I would like just to know from your view our understanding was in the past that management of if you would be involved in participating in, let's say, in the markets and visiting investors in order to explain where is the Company related to the potential stay of this 20%. And given Anheuser-Busch's decision to stay with apparently basically in Chile? Did anything change, are you planning, are you still invited to go with the Company to visit clients or you haven’t received any equation from the Company or any, let's say, demand from how Anheuser-Busch relate to that?

We have no information regarding this point yet.

Okay. And regarding Argentina, my question was I see that year-over-year price increase but I was surprised based on my calculations; we saw big decline in the price in the third quarter versus the second quarter. In local currency in Argentina, Argentinean pesos and if I look back 2003 I did not see these decline in prices in the third quarter versus the second quarter of 2003. Maybe my calculations are wrong, I would like just to understand if this is a normal process that what happened? Maybe I am wrong in the calculations, I just want to check really an indication about the pricing environment during the quarter?

I think that what you said that you are wrong in your calculations, but I would suggest -- I will ask [inaudible] our IR manager to call you later in order to discuss in details these stages, but we have constantly increased our prices.

Okay, thanks for that. And my final question was related to the cost environment in Chile, the cost of goods sold. I understand that in this quarter there was something related to your presentation meet with returnable bottles. And I would like to just have an indication about what should we expect in terms of cost of goods sold per hectoliter going forward?

Okay. I mean, the cost of goods sold has to be mentioned with too many issues. Returnability one way, this is first issue and the second issue is the exchange rate. Let's go to the exchange rate. If you know probably more than 90% in order to be -- to give you the right figure, 92% of our raw materials in the beer business has relation with the dollar. Then if the Chilean peso has an appreciation as we have had in the last 12 months, we reduced immediately 92% of our direct cost. In the other case, we increased our direct cost. We expect the Chilean peso to continue appreciating in the future. Then we expect -- to expect our cost to continue going down in the future. But, I mean this is just our opinion, of course, we could be wrong in this part, this is number one. Number two, of course, the cost of or the direct cost when we sell a returnable bottle is less than when we sell a one-week packaging. On one hand, we have made an effort to keep a high percentage of returnability in our business because it's an important value [inaudible] on one hand and it gives us a lot of profitability on the other. But at the same time, we accept and we will accept more in the future to grow the percentage of our sales represented by one-week packaging because this is a way to increase. Therefore, capital consumption and to be presenting new occasions of consumption, then in the future we'll have these two effects; one effect, which will increase direct cost, which is increasing the percentage of 33% by one-week packaging and the other effect which will decrease our direct cost which is the further appreciation of the Chilean peso. Probably, I mean -- probably there is a third effect which is the following, the direct cost of premium brands or super premium brands is higher than the direct cost of regular beer, and thus we expect to increase the percentage of premium in the future, I mean, this -- I would say that this a third effect.

Thank you and once again, if any one has additional questions please "*" "1" on your telephone keypad. And our next question is from Jose Yordan with UBS.

Hi, good morning Patricio. My question is -- one of my questions was the one asked by Tabias (phonetic) that I also see a sequential decline in pricing and it may have to do in Argentina, and it may just have to do with something having to do with exchange rates, but if you want to talk off line we can do that. My other question was, you mentioned in the beginning about preparing for AmBev's arrival in the event that take controls of Quilmes, but as I am sure you saw a few days ago they announced that they are not going to -- the BAC that controls the shareholders of Quilmes is not going to exchange their shares now and they are giving up a substantial premium on a part of their AmBev shares that they would get every time they believe that in three, four years, they will get more money because their EBITDA continues to grow. And so does this decision by them change your, let's say, estimate of when AmBev could be arriving into the scene assuming that Quilmes will continue to be incentivated by maximizing EBITDA from now until the time they do exchange.

Thank you. Thank you for José for your questions.

Regarding the pricing in Argentina in the second quarter we had 31 -- almost $34 per hectoliter in the third quarter. We have basically $3 per hectoliter, but this is not -- this is not a decrease in the price. It has more relation with some practical things in the marketplace. I don’t if you and Tobias were talking about that. If the decline goes from 34 to 33 the answer is yes, that is practical.

No mine goes to 29. But it makes me a computational problem or a mistake of the press release.

Okay, then we'll go into more details in that. Of course, we have received the news that BAC decided not to exercise its option giving up a huge premium. And we understand the process. Of course probably because of that -- and they will take more time to compete hearing [inaudible] 100% of Cervecerias Chile. But our decision to strengthen our portfolio as much as possible is the same. In fact, it has not just relation with the fact of facing the competition, but as we mentioned, also we decided we want to increase per capita consumption. In order to do that we need to strengthen our portfolio in order to capture volume from all the niche states, number one. Number two because we are competing against wine, against pisco against soft drinks and for the share of Tomás here in Chile. Then our decision to strengthen our marketing efforts behind our brands is not going to change.

Okay. Great.

Thank you [inaudible].

Thank you, and once again any questions or comments "*" "1" on your telephone keypad. And we have no further questions and sir, you may continue please.

Okay. So, I would like to say that we are optimistic about the future of CCU because the signals of economic recovery have continued in Chile and Argentina, which are having a positive impact on the company's results. Also, we are making a lot of efforts in order to support our brands and our volumes and our new categories and we have been very successful in all those efforts. Finally, [inaudible] which has a problem one-year goal is beginning to improve, it's results and in spite of the appreciation with Chilean peso and we are happy because of that. I would like to thank all of you for attending our conference call and I hope to see you soon.