Compania Cervecerias Unidas SA (CCU) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Compania Cervecerias Unidas third quarter earnings web-based teleconference. Today's conference is being recorded. And at this time, I would like to turn the call over to your host, Mr. Patricio Jottar, the chief executive officer. Please go ahead, sir.

Good afternoon and thank you for attending CCU's third quarter of 2005 conference call. I'm here with Ricardo Reyes, CCU's CFO, Luis Eduardo Bravo, our IR manager (inaudible - accent). You have received the company's results for the third 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 during the quarter. After these remarks, I will gladly answer any question you may have.

As I mentioned during the last two conference calls, CCU has a balanced strategy based mainly on building profitability, and the ways we do that are by increasing volumes and margins. During the first half of the year, we were oriented towards volume growth in all product categories, and this was fostered by the robustness of the team and Argentine economists, as well as higher marketing expenses. During this time, we saw fixed cost pressures, due to general factors such as distribution expenses and plastic raw material costs, mainly paid explained by higher oil prices and higher energy cost as a result of the Argentine gas prices.

The mitigating part to (ph) this effect as well as the effect of inflation, in June we began a process of adjusting prices in all of our business segments. The better pricing environment allowed CCU to improve its results during the quarter. Additionally, volumes continued their positive trend, increasing 6.1%. Also, updated(ph) revenues grew 13.9%. Operating income increased 18.4%. EBITDA rose 7.2% and net income grew by 48%.

I will turn now to discuss briefly the main issues in each of our business segments. The operating results of the Chilean beer business improved 19.8%, mainly explained by 11.3% high revenues. This increase in revenues is a consequence of 4.9% higher volumes and 6.1% higher prices during the quarter. In July, we launched our marketing campaign with a new image for our main brand, Cristal. During the quarter, we introduced new bottles for Cristal, including one liter returnable and non-returnable presentation.

Additionally, we introduced a 1.5 liter, one-way plastic bottle and a five-liter one-way barrel. All these new presentations allow Cristal to continue as the leader of innovation in the Chilean beer market. We are very satisfied with the good results obtained in Argentina. Sales volume grew 5.7% in the quarter and prices in dollar terms increased from $33 per hectoliter in the third quarter 2004 to $41 per hectoliter during the third quarter of 2005. This good improvements was reflected in the 32.7% higher revenues and 83.3% higher operating profits in dollar terms of our Argentine subsidiary.

Nonetheless, the Argentine beer business results, once translated to Chilean pesos, are distorted due to a variation in the exchange rate. The improvement of the soft drinks, nectars and mineral water segments stood out. Operating results increased 121.4%, reaching $4.3 million. This positive outcome is mainly explained by higher volumes and prices in almost all categories as well as lower cost and expenses as a percentage of sales. We are very satisfied with the results of Mas, a broad extension of Cachantun mineral water. This new product launched at the end of February is a sugarless, citric-flavored soft drink based on mineral water with calcium and Vitamin C. Mas explains the excellent performance of the mineral water category, which grew by 34% during the quarter.

During September, we launched the marketing campaign, I want a better world for this impact (ph). This contained presents in a funny way, different ways that inaudible propose to have a better world. The profitability of the one segment was affected by the 12% appreciation of the Chilean peso, which represented approximately 1,800 million Chilean pesos in lower revenues, which have a direct impact on the operating results as well as higher direct cost. These two negative effects were partially offset by a 16.9% increase in export price in dollar terms and 6.1% higher prices in the domestic market.

The new company, Compania Pisquera de Chile, continues the consolidation process between Pisconor and control operations, using CCU's shared services. Pisco prices increased 11.9% in the quarter. We are very optimistic about the potential of this new company and its future contribution to CCU's consolidated results. The benefits of this association will be captured by year end and throughout 2006.

Last August (ph), (inaudible - accent) factory located in Santiago. (inaudible - accent) facilities are very modern with quality certifications - HAA (ph), CCP and ISO 9001, 2000, with a production capacity of 6,900 tons per year. This application will enhance Calas' position in the coffee segment of the well to drink - of the well to eat market. In September, we entered the chocolate bar business with Calapnos(ph), a high quality chocolate with whole selected almonds. Having discussed the highlights of the third quarter 2005 as well as some recent events, I will now be pleased to answer any questions you may have.

(Operator Instructions) And at this time, we do have one question in the queue and that comes from Rodrigo Martin from Santander. Please go ahead.

Thank you and hi, guys. Results for the third quarter were about all right and congratulations on that. I just wanted to know if you have an outlook of the beer business in Chile since Brama (ph) has been starting separations on September. It would be great to have your view on how aggressive do you think this new drink will be.

Thank you for your question. As you know, we have been informed about the launching of Brama in the Chilean market for many months, for years, I would say, and we have been preparing our company to face this new competition. And as we have stated many times in the past, the thought of a new brand coming to the Chilean market is positive for the market because there is more noise and more relevance of the beer category in Chile. And if you see a Brama commercial on television, your first reaction is that you would like to drink more beer. And if you drink more beer, 90% is going to be provided by CCU. Then, the increasing the per capita consumption is a positive outcome for CCU of the entrance of a new player.

They launched the new brand Brama at the end of September. That is very soon to analyze if the per capita is growing or not because of the new actor participating in the company. I could say that the volumes in October were very, very strong. But again, many things could be behind this result. But at least October was very good. They decided to launch Brama at a price parity with Cristal, which is good news because we are not having a price war but we are competing in the marketplace with marketing, which is very positive also for them, for us and for the industry as a whole.

We do not have former seekers (ph) of market share. The only information we have is this scan check, which is a market share which comes from supermarkets. That supermarkets would be sent 20% to 25% all volumes. Then it's not necessarily a good - it's not necessarily a good signal what is happening in the market as whole, but it's a good representation because supermarkets are the first place where newcomers are taxed. And at least during the month of October, we have not lost to markets in supermarkets. They have cannibalized their own brands.

Then, I would say that we are - as we have said in the past - we are happy with the fact of Brama competing in Chile. We expect the market to grow, probably we're going to lose some market share sooner than later. But the final result, I think, is going to be positive for us.

Okay, thank you very much.

Thank you.

(Operator instructions) And we will now hear from Jose Yordan from UBS. Please go ahead.

Hi, good morning, Patricio. I'm sorry if you addressed this in the preamble, but I was interested very much on your views of where margins for beer are going to go next year. In the third quarter, there was an unusually high marketing expense, but once that normalizes, both gross margin and EBIT margin should begin to rise at a much faster pace, and I was just wondering about your view of when that's going to happen, let's say, is it going to accelerate into the winter quarters or not?

Thank you, Jose, for your question. There are two effects in the third quarter regarding margins - a positive one and a negative one. The positive one is the increased prices at the end of June, beginning of July, in most of our beer brands, by 6% to 6.5%. And this is an advantage in terms of margin short-term. Looking for 2006, as a little of inflation comes - because we'll have a 2% or 3% inflation expected for 2006 - higher prices will erode a little. And we are not necessarily expecting to increase price again in 2006.

This is the first effect, which is very positive in this quarter, which will be positive for the next year because of the prices are still there and high, but it will begin to decline as inflation capture part of this effect. This is number one. Number two, the exchange rate in Chile, or the peso, is stronger than before. And as you know, more than 90% of our raw material is represented by imported products or products which are produced in Chile but with prices determined in dollar terms.

And because of that, we're increasing our margins, particularly at the end of the third quarter and in the whole fourth quarter because the peso today is stronger than at the beginning of the quarter. And finally, viewing the third quarter of 2005, our marketing expenditures were very high because we wanted to have the brand equity for our brands in a very high position before the launching of Brama. And then probably it is not, I would say, it is not a normal level of marketing for 2006. Putting it all together, I think the margin in 2006 should be similar to the margins we are having in 2005.

But how could that be if you're going to have a full year effect of your price increase and you're already, like you said, in the first quarter of last year, and really second and third as well, you had unusually high marketing expenses. I would expect your margin in the beer business to go up at least a point in '06. I mean, what am I missing there?

I mean, there are some elements which allow us to feel positively about the possibility of increasing margins. But again, Jose, you know we do not make formal projections in terms of figures. And margins are figures, so -- but then again, we think that we should keep our margins or probably increase it as you're saying, but no formal prediction.

Okay, thanks.

Thank you.

And we have one question remaining the queue, and that comes from Andrea Texeira from JP Morgan. Please go ahead.

Hi. Good afternoon, Patricio. I just wanted to -- in terms of the wine, do you have any outlook in terms of the pricing domestic and also going forward if you can guide us in terms of gross profitability in the business and also given the fact that Pisco(ph) is getting attraction not only from you but also other players, is that any impact that you foresee for next year in terms of the grape crop and the impact on profitability for your business going forward? I would appreciate. Thank you.

Thank you as well for your question. As you know, the total amount of wine produced in a year depends on the total amount of grapes which has been rather stable. We think that in 3 or 4 more years, we'll have more grapes than we have today, but the total amount of grapes is going to be stable in the next few years.

Then we have to deduct all the wine which is exported because it's always a better deal to export wine than to sell it domestically, and the difference is sole domestically. And as exports have been growing strongly the last few years, the total amount of wine to be sold in the Chilean market has decreased. And because of that, the price of the domestic wine has increased. We think that the price now is very high, it probably could increase a little more during 2006 but not as importantly as it has increased in the last two years where the price of wine has increased by 40% roughly.

In the case of Pisco in the beginning of October, the industry increased prices again by something like 10% to 15% which is very good news for Pisco and for beer. And I think that it's difficult to see additional increases during 2006, but, again, in the results of the quarter, you saw the increase of price of Pisco is not there because we increased in the first half of October. Then again, I think that summarizing the price of wine is going to be stable or higher and the price of Pisco is going to be stable or higher, which is good news.

That's very helpful. Thank you, Patricio. In terms of -- that covers the cost side and also -- but in terms of the beer, do you think that all this change because of the weather, as my understanding, has been helping also so the transferring to -- from wine into beer in the domestic market, do you view that this is going to be sustainable going forward?

I know that Brama or the Brama brand improves in a sense -- more marketing behind the beer brands and also improving your side of it, but I was curious about, in terms of the secular trend, in terms of substitution between -- wine and beer, how is your view for 2006?

Yes, we spent a lot of money, of course, trying to understand the consumer, especially the young consumers, 18 to 24 years old, and to understand which are their patterns of consumption and their preference of the different alcoholic beverage. And both the volume trends in this group of people and the quality analysis we have made on them, show us that the increase in total volumes of beer is something real which will stay there.

I think that -- I mean, the per capita this year is going to end in 30 liters or more than 30 liters -- used to be 26 liters 3 years ago -- and I think that's a very surreal change of habit behind this result. Of course, the fact that the price of wine increased allows some people to move from wine to beer. But now they're not going to move again from beer. Then we are very positive about future volume trend in the beer business. And as I've said before, October was very strong.

And you're not concerned about going to Pisco because you have 60% share on that business as well, but you have a lower share than you have in beer, so at the end of the day if you're having more competition from Pisco as is the highest growth, I mean the youngsters will probably be more inclined to go to Pisco because the new product has a lot of marketing behind it as well. So how do you feel about transferring to Fisco on more of a long-term trend?

Yes, I think that both categories -- I mean, number one, we have separate business units to sell in each one of the categories, and we try to promote both of them. I mean, we do not try to promote one of them and to decrease the volumes of the other, nor to move consumers from Pisco, number 1, because it's not right -- it's not correct to do, and number 2 because it's very difficult to do.

And then we try to promote Pisco as much as possible and beer as much as possible. And we've seen that there is room for growing both categories. More in beer, slightly, than in Pisco because beer has been rather tame the last years and Pisco has grown a lot, and Pisco's beginning to compete more strongly against rum, because two years ago the excise tax of rum was much higher than Pisco. And today, I mean there - this is a long story, but today we have the same excise tax for these two categories.

And additionally, we are trying to make a deal with -- it was informed to the public by category trying to make a deal to concentrate higher market share in the Pisco business.

But you still feel comfortable that you might after this decision, the negative decision, on the first -- I know it's not a final decision, I know it's part of -- it's not the Anti-Trust Commission but it's a negative indication that you might not be able to acquire Catal(ph). So if you have any -- you're still confident that you can still be on the -- trying to acquire --?

I mean, as you know the decision is going to be stayed by Tribunal de la Libre Competencia, which is the free competition tribunal. And the fiscal(ph) gives just his opinion to the tribunal. It's not the first instance decision. It's just an opinion, and many times in the past the tribunal has accepted his opinions and other times the tribunal has not accepted the opinions. And we think that we have very good arguments in our proposition. Number one, the Pisco is not a category by itself, because Pisco at the end of the day, competes against rum, vodka, beer, wine, et cetera, et cetera. And if you increase prices of Pisco, you lose consumers.

And number 2, there are no barriers of entry in the Pisco business. In fact, we entered 2 years ago and we took 20% market share in 12 months. This is the best demonstration that there are no barriers of entry. Then if the relevant market is higher than Pisco, the whole beverage industry -- the whole alcoholic beverage industry, number 1.

And if there are no barriers of entry, we think that we have good arguments to be at the top tribunal to have a positive result. But, of course, we don't know which is going to be the final result, and we respect the final decision or the decision of the tribunal. But again, what the fiscal said in the newspapers is just an opinion.

Okay, great. Have you seen any sort of like negative trend in the growth or - should have rephrase that - any deceleration to go for water after Catal made that change. I know it's only a factor the next year, but you're probably going to have more competition on that front as well, right?

In the case of water and the case of nectar, which are more natural products, the trend - or the growing trend is very, very strong, and we have not seen any signal that this trend is going to change or is changing. In the case of the soft drink business, we have seen the trend of growing less than the other products, which is something predictable and because at the end of the day, it's logical that consumers in a country like Chile, where the per capita of soft drinks is very high, moved from soft drink to mineral water, functional products and nectars. This is what we have seen, but the difference is this trend is positive for us because we have a higher market share in water and in nectar and in functional products than we have in soft drinks. But again, the trend in mineral water is very, very strong.

Okay, that's very helpful. Thank you very much and again congratulations on the results.

Thank you very much.

And at this time, there are no further questions. I would like to turn the call back to you, Mr. Jottar, for any additional or closing remarks.

Thank you. We are optimistic about the future of CCU. Economy recovery continues in Chile and Argentina with a positive impact on the company's results. Additionally, with the price increases recently carried out CCU's profitability should continue improving. Finally, I would like to thank all of you for attending our conference call and I hope to see you soon.

Thank you, everyone, for your participation. That does conclude today's conference.