Compania Cervecerias Unidas SA (CCU) 2004 Q4 法說會逐字稿

Welcome to the Compania Cervecerias Unidas Fourth Quarter Earnings Release Conference Call. This conference is being recorded; and now, at this time, I'll turn the conference over to Mr. Patricio Jottar, the Chief Executive Officer. Please go ahead sir.

Good afternoon and thank you for attending this year's fourth quarter 2004 conference call. I am here with Ricardo Bartel, the new CFO, Luis Eduardo Bravo, CCU's IR Manager, and analyst Jorge Bustos.

You have all received the Company's results for the fourth quarter 2004. 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.

We are satisfied with the results of the year 2004. CCU reached record levels in volume sales of [11.3m] hectoliters. Revenues of $755m, operating results of $105m and EBITDA of $177m. We had a very solid performance in all our business units.

During the quarter, we increased operating income 1% and we have a flat EBITDA with a satisfactory result, because we are comparing with an extremely good fourth quarter 2003 in terms of the volume, price and a very low cost of raw materials, due to the appreciation of the Chilean Peso during that quarter.

During the quarter, we refinanced our long-term debt, taking advantage of the low interest rates. At the end of September, we prepaid our local bonds for approximately $32m. In November, we replaced the syndicated loans taken in 2003 for 107 -- [$135m] by a new one of $100m. And in December, we issued a new local bond of US$2m, approximately $59m. The new bank loan was syndicated by 10 banks and transformed into fixed rate U.S. loans through a cross-currency swap.

I will turn now to discuss briefly the main issues in each of our business segments.

The Chilean beer business increased its operating results 13.1% during 2004, reaching $30.8m. The premium segment has continued growing, reflected in the highest sales of Heineken, Kunstmann, Budweiser and Royal. Additionally, during December, the Company reached an all-time high volume sale of almost 580,000 hectoliters, representing an increase of 13.7%. The year 2004 was the second consecutive year that total revenues of the beer industry in Chile grew more than GDP, reflecting the success of our ACC Plan implemented during the second half of 2001.

After our competitors made public their sales volumes for the third quarter, we estimated our market share in beer in Chile increased from 88% in the third quarter 2003 to 90% in third quarter 2004.

We are very satisfied with the good results obtained in Argentina. Sales volume grew 10.5% in the year and price in dollar terms, finished the year $37 per hectoliter, from $30 per hectoliter at the beginning of the year. Prices were increased 8% last December. This good performance was reflected in higher revenues and an improvement of $6.1m in the operating results. Additionally, market share increased from 15% in fourth quarter 2003 to 16% in fourth quarter 2004.

Turning to soft drink, nectars and mineral waters segment, operating results increased 19.3% during 2004, improving volume sales in all the categories. Nectars and mineral waters had a high growth of 12.6% and 6.8% respectively. The higher volume plus the appreciation of the Chilean peso have improved the profitability of this segment. Additionally, during the quarter we re-launched Nobis, a traditional soft drink brand to be used strategically against B-brands, and introduced new 250cc cans for Bilz, Pap, [Kem], Pepsi and 7-Up. Gatorade, the number one isotonic drink in the world, more than doubled its volumes in December, after the launch of the sports bottle at the end of the third quarter 2004.

The wine segment also improved its profitability during 2004, growing its operating results 34.6% in spite of the appreciation of the Chilean peso. This improvement was the result of the rationalization plan undertaken by Vina San Pedro to reduce costs, expense and a number of the SKUs, as well as higher prices in the Chilean domestic market and in dollar terms in exports.

As you know, we entered the pisco business in February 2003, with the brand Ruta Norte. In January 2004 we launched the new Ruta Sour, a pisco sour ready to drink, a typical Chilean drink that combines pisco, lemon and sugar. Last November we introduced Ruta Sour Light, a cocktail with less sugar and lower alcohol content than Ruta Sour. The sour light is a new category in the industry that has already 5 percentage points of the pisco market. Ruta Norte is already the second brand in the market, less than two years after its launch. Altogether we have a market share of 18%, according to the last AC Nielsen measurement.

Having discussed the highlights of the year 2004, as well as some recent events, I will be pleased to answer the questions you might have.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question today will come from Robert Ford, from Merrill Lynch.

Good morning guys. Patricio, my question was with respect to the fourth quarter. If I look at the cost of goods sold impact, you said it's up 9.9% in beer and pisco, but you also have an incremental, roughly 5.5% in currency price appreciation year-on-year. Why -- can you explain a little bit more about why the raw material environment was so favorable in 2003 and there wasn't some incremental benefit in 2004, please?

Thank you, Robert, for your question. Unfortunately, while you were making your question, the communication was interrupted many times. Is it possible for you to repeat the question? Excuse me.

Absolutely. With respect to the currency environment, it's my -- my perception is that the Chilean peso strengthened another 5.5% year-on-year, and I'm surprised that you had so much raw materials pressure. Can you walk us through the source of the raw materials pressure in beer, in Chile specifically, but also touch on Argentina and the pisco business?

Yes. [Inaudible].

Pardon the interruption. Mr. Jottar, we are unable to hear your response at this time. Pardon the interruption. Mr. Jottar, we are unable to hear your response. Ladies and gentlemen, please stand by while we isolate our technical issue. Once again, please stand by. Please stand by. We're still waiting for the technical issue to be resolved with the moderator's phone line. Please continue to stand by, as we're awaiting the reconnection of the moderator's phone line. And ladies and gentlemen, we have been rejoined. And Mr. Ford, if you could just please repeat your question.

I sure can. Patricio, with respect to the raw materials environment, you referenced the more favorable FX environment in fourth quarter 2003, but my understanding is that the currency strengthened another 5.5%. Can you walk us through the source of the raw materials pressure and the influence of the FX environment?

Thank you, Robert, for your question. And excuse us everybody [by staying] in this conference call. Apparently we had a problem with the communication, and I was able to listen to you but you were not able to listen to me. As far as I understand now, you’re understanding or you're listening perfectly to my voice.

In the beers segment, we increased the cost of raw materials by 7.9% and we increased our net revenues by 2.6%. This is the information we made public, and it has relation with two phenomenons. But number one, and the most important, is that we increased the percentage of our sales represented by some one-way packaging, mainly cans. And particularly, during December the cost of the competitive environment, our competition was dictating strongly on what's gaining some points of the market share in supermarkets in one-way packaging. And we answered with a can promotion, which increased the percentage of one-way products. But this is the main reason.

At the same time, you are right when you say that the Chilean peso continued appreciating, because in December 2003, the value was 593, and December 2004 the value was 557.

Having said that, the average in the last quarter of 2003 was lower than the average during the last quarter 2004. We don't have the figures here with us, but Ricardo Bartel, our CFO, went to his office to bring the figures. And if you compare December -- December 31 with December 31, it's not a good explanation of what happened during the whole quarter. And as soon as I have the information, we will give it to you.

Thank you Patricio. In addition to that, can you walk us through what's happening, specifically in the fourth quarter, in soft drinks, because that too looks like competition's heating up a little bit. And the decision to launch Nobis perhaps suggests that B-brands are becoming a -- are having a bigger impact.

Yes. Before that, I said that there were two explanations. The second explanation for your first question is that we increased strongly the percentage of premium rate beers, which are more costly in terms of packaging and the product, and the product itself. And here we have information, and if you take the average in fourth quarter 2003 compared with the average in fourth quarter 2004, we have -- No, no. You are right, a 5% appreciation. You are right and we have a 5% appreciation. The answers are the two that I made before. Number one, the one-way packaging and number two2, the higher percentage of the premium brands. Regarding --

But even there, with respect to the higher proportion of premium beer sales, don't the prices more than compensate for the packaging costs in the premium beer? Isn't that a higher gross margin?

Yes.

Okay. I just wanted to make sure. Okay. Thank you.

Yes. Okay. So, your question regarding Nobis. For many years, we decided not to launch a B-brand. As you know, B-brands were launched in Chile five years ago or four years ago. And beginning from zero, today their percent of market share according to Nielsen of 12% but probably the real figure's something more similar to 15%. And we are not a B-brand, we're an A-brand producer. That's the reason why we decided not to launch a B-brand.

Nevertheless, the Coca-Cola Company, which is our main competitor in Chile, decided to launch some B-brands. And in fact, we don't have official figures but according our information, for the quarter today the largest B-brand producer here in Chile, with half a million of hectoliters, with their diet brand. And interestingly, Coca-Cola has an advantage in some points, because they had all the A-brand portfolio. And additionally, they have a B-brand portfolio. And in some specific points of sale, some specific regions, it is important to keep a good relation with our clients to have the whole portfolio.

This is the reason why we decided to launch our B-brand, but our idea is to keep the volumes as low as possible, and only to use it tactically with those clients who were – Coca-Cola is doing the same.

And because of that, we expect it not to hurt our results and our margins. But it's really, quoting [indiscernible] our margins, particularly during December and in January the trend is the same. It's the high percentage of our sales and also in the business Coca-Cola, represented by the 3-liter one-way packaging of our A-brands. This is a very low price per liter packaging in one-way, and it's becoming very popular among consumers.

We have a concern related with that, and of course we'd like to increase the price of that. But when we increase the price, B-brands and piscos suffer their volumes. This is our main concern in terms of margins in the soft drink business.

[OPERATOR INSTRUCTIONS]. And Mr. Jottar, there appear to be no further questions at this time.

Okay. Thank you. We are optimistic about the future of CCU. 2004 was a very positive year and 2005 should follow the same path. Economic recovery continues in Chile and Argentina. We are having a positive interest on the Company's results and Vina San Pedro has improved its results, in spite of the appreciation of the Chilean Peso.

Finally, I would like to thank all of you for attending our conference call, and I hope to see you soon. Thank you.

And that does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day. And now, at this time, you may disconnect.