Compania Cervecerias Unidas SA (CCU) 2005 Q1 法說會逐字稿

Welcome to the Compania Cervecerias First Quarter Earnings web-based teleconference. At this time, I will now turn the call over to Mr. Patricio Jattar, the CEO. Please go ahead, sir.

Good afternoon, and thank you for attending CCU's first quarter 2005 conference call. I'm here with Ricardo Bartel, CCU's CFO, Luis Eduardo Bravo, CCU's IR Manager, and analyst [Corky Busto]. You have all received the company's results for the first quarter, 2005. 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.

CCU has a balanced strategy based mainly on building profitability and the way to do that is by increasing volumes and margins. In 2004, last year, first quarter, was oriented to increase profitability by building margins. In fact, during the first quarter of 2004, operating income grew 51.3%, operating margin increased from 15.3% to 21%. EBITDA grew 26.6%. EBITDA margin increased from 26.3 to 30.1%, and volumes only grew 3.1% in Chile and 5.2% at the consolidated level. The first quarter of 2005 was, as you know, different.

As the economy is growing between 6% and 7% in Chile and Argentina, we expect to create results to- through volumes. For this reason, the first quarter 2005 was oriented to volume growth in all the categories. Looking forward to the future, the higher volume base will give us the opportunity to build profitability on a healthy and strong way, according CCU's strategic [inaudible] of profitability, growth, and sustainability. Consistently, with this strategy, volumes grew 10% during the quarter, supported by economic growth and higher marketing expenses.

Nevertheless, we faced some external factors that affected costs and expenses. Higher oil prices affected distribution expenses and plastic raw material costs, mainly PET. Additionally, the Argentinian gas prices obliged us to use diesel oil instead of natural gas, both in Chile and Argentina, since mid-February. On March 12th, the [Assembly of Cooperativa y Agricola Control Isquierdo del a Que Marie], Control, approved the application with CCU to create Compania de Izquierda de Chile. This new company, owned 80% by CCU and 20% by Control, began operations on March 14th. We are very happy with this new venture that's already had 50.1% market share in the [inaudible] industry, according to the last A.C. Nielsen figures. We're able to lead this market two years after we launched Grupo Norte. The portfolios of the two companies complement each other. Grupo Norte and [inaudible] are focused on younger consumers, and Compania products and [Mistral] is a very strong brand in the premium segment, as well as Companiria [Sour] that is the leader in the sour category. On July 1st, all the [Pisco] products will be sold by an exclusive and integrated sales force in the largest places of Chile and distributed by transport by CCU. Besides, all the back office support for this new company will be provided by CCU's shared services, reducing significantly its operating expenses.

In the first quarter-- in the first quarter results, we have not included the financial figures for the new company, which will be presented for the second quarter results as a new business segment. I will turn now to discuss briefly the main niches in each of our business segments.

The Chilean beer business increased volume by [12%] during the first quarter, 2005, reaching almost 1.5 million hectoliters. The premium segment has continued leading the beer growth. The profitability of this segment was affected by promotional activities related with [Crystal Can] beer in supermarkets, higher energy costs, and the absence of price increases to recover inflation. We are very satisfied with the good results obtained in Argentina. There volume grew 7.7% in the quarter, and price, in dollar terms, increased from $32 per hectoliter in the first quarter of 2004 to $37 per hectoliter in the first quarter of 2005. This good performance was reflected in 15% higher revenues and 63% higher operating results.

Turning to soft drinks, nectars, and mineral water segment, volume sales in all categories increased. Soft drinks grew 5.6%, nectars 17.8%, and mineral water, 23.5%. Nevertheless, the profitability of this segment was affected by higher energy costs as well as higher cost of plastic raw material, mainly PET. [Runway Soft Drinks] packaging moved from [inaudible] 59% of total mix in the first quarter, 2004, to 65% in the first quarter, 2005. [inaudible] both effects, we estimate a negative impact in operating income of 830 million Chilean pesos in this segment. We are very happy with the launch of [Man], a brand extension of our [Cassion Two] mineral water. This new product, sugarless citric-flavored soft drink, based on mineral water with calcium and vitamin C, this new product, that has a premium approximately 45% over regular mineral water, should provide further growth opportunities in volumes and profitability.

The wine segment has continued improving its profitability, although it remains slow. During the first quarter, 2005, the operating results grew by 0.6 million dollars, in spite of the appreciation of the Chilean peso. The improvement was the result of the rationalization plan undertaken by [Billa Compello] to reduce costs, expenses, and the [non-refresca] use, as well as price increases achieved by the company in the Chilean domestic market and in dollar terms in export.

Finally, after a year in the confectionary business, we are very happy with the performance of [Calas]. We increased volumes significantly during the first quarter of 2004, selling more than 1,000 tons of Calas products.

Having discussed the highlights of the first quarter, 2005, as well as some recent events, I will be pleased to answer the questions you might have.

[Operator Instructions] Paulina, Santander Investments.

Considering your volume growth strategy, and further possible increases in PET and energy costs, how do you expect your margins to come along during the rest of the year? And also, are you planning other promotional campaigns, which could have an affect on your margins?

Thank you, Paulina, for your question. I would like to be very precise in this point -- we have not changed our strategy from profitability to volume. Profitability remains our first priority. However, in order to build profitability, you need volume and you need margins. Last year, particularly third quarter 2004 was strongly oriented to build margins. This quarter was strongly oriented to build volume, but at the end of the day, we are looking for building profitability, both through volume and through margins. And one quarter is a very small period of time in order to assume that what has happened in the last quarter is what is going to happen in the next three years. In fact, we made public our strategic plan in the last conference call, and we said that profitability remains our main objective in the period of 2005-2007. This is number one.

Number two, we prefer as always not to make official predictions on margins in the future, but we-- we are taking some measures in order to increase margins, and we expect to increase them in the second quarter of the year, and we expect no particular promotional activities different than usual during the second quarter.

Reynaldo Santana, Deutsche Bank.

Yes, good morning, everyone. I just have a question regarding margins that you said you expect an improvement for the rest of the year, or the goal to improve margins. Did you expect price increases in the beer sector, and also do you expect continuing growth in non-returnable presentations in the beer sector? And my second question has to do with Argentina - do you expect, because we saw a recovery in Argentine prices both year over year and quarter over quarter, higher than expected. If-- was there a consumer price increase as well as a change in the mix that reflected this price increase in Argentina?

Regarding Chile, during 2003, we increased prices of beer by 10%, which is above inflation. In fact, inflation in 2003 [inaudible] was down to like 3%, 2.5%, and by doing that, at the end of 2003, we began 2004 with a very high- with very high margins, and I mean, we-- the last many years, we have been able to increase prices and margins according to inflation. It happens that, again, in 2003, we increased much more than inflation, in order to capture some price points which were attractive for us to capture. Because of that, we didn't increase prices in 2004. And we are not sure if we are going to increase pricing in 2005. What we are going to do is to increase prices in some one-way packaging, and increase prices of the premium, super-premium brand, because the economy is growing. The demand in super-premium products -- not just in beer, but in all categories, is booming, and of course we capture more margin-- more margin there.

The increase in the percentage of sales represented by one-way has two effects. A long-term effect, which has relations with an increase in the supermarkets, where most of the sales are one-way, and of course this trend will continue happening. And a short-term effect, related with some promotions we made in [Cristal] in supermarkets in 200- during the first quarter of 2005, which are not going to happen in the second- in the second quarter.

In relation to Argentina, as you probably know, prices in dollar terms before the big devaluation, 2001, were in the maximum during July, 2001, were $56 per hectoliter. After devaluation, we decreased our prices to $16 per hectoliter. Today, we are running at $37, and of course, we would like to increase those prices more than- more than 37, maybe in three, four years, I don't know exactly, to recover the prices we had prior- the big prior-- prior the big devaluation, particularly because we are facing some inflation in Argentina. In fact, in the first quarter, we had 4% inflation, and if we don't increase prices in dollar terms, or in pesos -- in Argentine pesos, in currency, in dollar terms, costs are going to grow and we'll not be able to continue growing EBITDA. And of course, we have two ways of doing that. Number one, is to increase the level of the price of all our products, which is what we have done in the past and we expect to do in the future. And also, increase the percentage of our sale represented by premium brands, particularly Heineken, which is performing very well in Argentina. We expect to continue growing with Heineken in the future.

Jose [Jorden], UBS.

I was wondering, I mean, if the strategy is to build volume, does it really make sense to be discounting cans in supermarkets and so forth, because the minute you lift the discounts, the volume growth will go away and you're back where you started. And given that you have a good back wind in terms of the cyclical recovery and wine prices in Chile, making it more favorable for people to switch to beer, that doesn't make sense. But are you saying that the can promotion is over by now, and it can also- OK- if you can also add a little bit of your view on where wine prices are going to continue going in the local market over the next year or two, that would be helpful.

What you are saying is 100% correct, and I would like to reaffirm that our strategy is to build profitability, and we build profitability through volume and through margins, but to build a strong volume base is very good, in order to increase margins faster and to capture volumes and margin. And we are not promoting cans at the [inaudible] price in the second quarter as we did in the first quarter.

Regarding the wine price, you're absolutely right, the price of popular wine in the domestic market has increased by 30% in the last year and a half, which is very good for the beer industry. I would say that this is the first time that we faced a good scenario in terms of domestic prices of wine in the last 10 years. And as far as the explanation on why beer has been growing on a very interesting rate, is the price of- in the price of the wine.

The exports in Chile are booming. They are growing a lot, 20%, and we expect the trend to maintain, and we don't have enough hectares in order to keep space on this drawing. New hectares are beginning-- many agricultures [sp] are beginning to plant new hectares, but we'll have the wine in four more years. Then, we expect the prices of wine in the domestic market to grow, or at least to keep current level, but never to decrease current level, at least in the next three to four years, which are very good news for us.

But you don't necessarily expect continued increases?

Ideally.

[Operator Instructions] [Andrea DeQuiera], JP Morgan.

I just want to touch base more about this greater percentage of premium beer. How does that relate to margins? As I'm seeing here, as you commented last quarter that it didn't affect much on the EBITDA level. Actually, it was a reduction in margin, and why is that? Why you cannot reach that scale in order to improve margins on-- at least on the premium? And also, can you touch base on the market share in Argentina. It looks you gained a bit of market share there, given that you increased prices by less than [Cumiz], as well as if you can touch on PET resin costs in the soft drinks and the water business. Thank you.

The main source-- I mean, we are growing all our premium brands in Chile, but the main source of growing has been Heineken, and during the last month, we have been supporting strongly with marketing most of our premium brands, because-- this is the reason why it increased in the- in the total volumes of premium beers, has not translated into higher EBITDA. But during February, we increased the prices of all our premiums by 5% or 6%, and very soon we're going to increase the price again by 7%. Then we'll have a very high price, with a regular promotional support. We will increase importantly the profit coming from our premium portfolio in Chile. We feel very confident regarding this point.

In the case of Argentina, we try to balance, of course, market share and price. I like to say that in terms of prices, we are almost followers of Cumiz, because Cumiz is the leader in Argentina and most of, you know, the industry where we participate, the leader is the one who defines the price in the industry. They decided to increase prices; we usually follow. Then only Cumiz knows if the prices will continue growing, but we think this is reasonable it happens because prices today are-- today are very low, and we'll never compete with prices in Argentina. We are brand-builders and we'll try to keep the increase in market share but increasing prices at the same level than Cumiz. Of course, in one particular quarter we could increase more or less than Cumiz regarding some specific actions or particular actions in different markets, but long-term, we'll grow prices with Cumiz, and ideally higher than that, by promotion Heineken and Budweiser, which are our premium brands in Argentina.

Finally, I didn't follow your question regarding-- would you like to answer, Ricardo?

OK, Andrea, this is Ricardo Bartel speaking. In order to try to improve or keep our profitability in the soft drink segment, regarding the increase in our portfolio the sales of one-way packages, we have developed a full program for at least one year for our main soft drink brand that we did [inaudible]. The two main issues for the [problem] are to increase the powerful, or the convenience, of the [inaudible] packages. And, on the other hand, we want to continue developing product in the categories that we are the leaders, as well as the nectar and mineral water. The one example for that is the launch of [Mascita] [inaudible] with very, very good results in terms of consumers and price, reception, and margins per hectoliter.

Yeah, but given that PET resins should continue to grow, even though [MAN] is going to bring higher margins, we should not expect a recovery in profitability, at least in 2005. Is that a fair assumption to make?

It's not easy to increase profitability, at least in the short term, in the soft drink business. We would like to. We will try to increase prices on winter time, and at the same time, we are promoting mineral water, particularly [Mas] and nectar, which are products with higher margins than soft drinks, and we are growing very good in those segments. But I mean, you're right when you say that it's not easy to increase profitability. Nevertheless, we have some plans, as Ricardo mentioned before, to do that. But of course we face a big challenge there.

[Operator Instructions]

We're optimistic about the future of CCU, as always. The economic recovery continues in Chile and Argentina, which of course- with a positive impact on the company's results, and [inaudible] improve its profitability, in spite of the appreciation of Chilean pesos, and we stay-- we are still absolutely committed to our long-term- to our long-term strategy in building profitability. Finally, we would like to thank all of you for attending our conference call, and I hope to see you soon.

[Operator Instructions]