Compania Cervecerias Unidas SA (CCU) 2005 Q4 法說會逐字稿

Please stand by. Ladies and gentlemen thank you so much for your patience. We would like to welcome you to the Compania Cervecerias Unidas third (sic) quarter earnings web-based teleconference. To view today's presentation full-screen, please press control H on your keyboard. To restore the original screen, please press control H a second time. Also, as a remainder, today's call is being recorded. And now for opening remarks, I would like to turn the conference over to Patricio Jottar. Please go ahead, sir.

Good afternoon and thank you for attending CCU's fourth quarter of 2005 conference call. I'm here with Ricardo Reyes, CCU's CFO; Luis Eduardo Bravo, our IR manager; and analyst Macarena Gili. You have received the Company's results for the fourth quarter of 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 questions you may have.

2005 set a new record for CCU. Our volumes reached 12.3 million hectoliters. Consolidated revenues increased to $960.1 million. Operating income grew to $129.7 million and EBITDA reached to $210 million.

The results of the fourth quarter were also very positive. Cost of related revenues grew 13.4%. Operating income increased 9.7%; and EBITDA improved 7.3%. This good performance is a consequence of higher volumes and prices in almost all of our business segments. These increases in volumes were supported by higher investments in marketing to increase the brand value of our products.

As most of you saw in our press release, all business segments improved performance during the fourth quarter 2005, with the only exception being wine, which was affected by the appreciation of the Chilean peso as was the Chilean wine industry as a whole. During the quarter, the local currency increased in value 11.3%, which represented approximately $2.2 million in lower revenues, which has [unintelligible] operating results. This negative effect was partially offset by 4.9% higher export price in dollar terms and 3.9% increase in prices in domestic markets. The management of Viña San Pedro has been strengthened focusing on distribution, brand value creation, enology, and innovation. We are confident that in the medium term the winery will recover its growth path. Without considering Viña San Pedro, CCU's operating results would have increased by 22.1%.

The operating results for the Chilean beer business improved 13% mainly explained by 13.4% higher revenue. This increase in revenue is a consequence of 9.5% higher volumes and 3.5% higher prices during the quarter. During the year 2005, we also grew beer volumes by 9.5% in spite of tougher competition, reaching record sales of almost 4.2 million hectoliters with outstanding results for Cristal, Escudo, Heineken, and [Consument] brands.

We are very satisfied with the good results obtained in Argentina. Sales volumes grew 9.4% in the quarter in price. In dollar terms they increased from $35 per hectoliter in the fourth quarter 2004 to $42 per hectoliter in the fourth quarter of 2005. This good performance was reflected in 30% higher revenues and 88.4% higher operating profit. Operating income for the whole year 2005 grew to $4.7 million, leaving behind the negative operating results of the past years.

The soft drinks, nectars, and mineral water segment improved its revenues by 8.4% as a consequence of 4.5% higher volumes and 3.5% higher prices during the quarter. We are very satisfied with the performance of mineral waters, nectars, and Gatorade, which increased their volumes by 30.5%, 18.2%, and 56.2% respectively.

Mas, a brand extension of Cachantun mineral water continued during this period with its excellent results. This new product, launched at the end of February last year is a sugarless citrus flavored soft drink based on mineral water with calcium and vitamin C, has promoted the creation of a new category in the Chilean bottled water business. This February we launched a new orange flavor for Mas.

We are very optimistic with the results of our pisco business. Its operating results improved by $2.6 million in the quarter, due to the association between Pisconor and Control that increased volumes and prices and captured synergies through the consolidation process, in addition to the use of CCU shared services. In December we launched [unintelligible], a premium pisco with 14[?] of alcohol in a plastic black bottle. Our confectionary business continues with its good performance in the quarter because volumes grew 22.3% during this period.

Finally, I want to share with you our review of the Chilean beverage industry. According to our estimates, the consumption of products ready to drink in Chile was 220 liters per capita in 2005 compared with 198 liters in 2004. They are composed of 30 wine liters of beer; 115 liters of soft drinks; 11 liters of juices; 12 liters of bottled water; 17 liters of wine; 4 liters of pisco and other liquid; and 32 liters of milk. Of this total, CCU’s share is 62 liters, making it the largest beverage company in Chile. Developed countries of Spain and the US have reported a consumptions over 470 and 580 liters respectively. This is a clear demonstration of the huge growth potential we have in the future due to the size of the industry as well as our share in it. The 230 liters per capita equivalent to a total consumption of 33.1 million hectoliters, which represents an increase of 8.5% compared to 2004. This includes 9.6 million hectoliters, 9.5% more than in 2004, meaning that the Company gained market share in the beverage industry in Chile in 2005.

Having discussed the highlights from the fourth quarter 2005, as well as some recent events, I would now be pleased to answer any questions you might have.

(OPERATOR INSTRUCTIONS) With Deutsche Bank, [Reynaldo Santa].

Good morning everyone. I just had a question first on Argentina where you still show very good or positive price performance. How much more upside do you see in 2006 given the recent government controls for inflation? Secondly, could you give us an update – or I am sorry, an outlook on the marketing expenses for beer in Chile for 2006. Thank you.

Thank you Reynaldo for your question. You said perfectly the big upside – most of the upside in Argentina in the last – not just in the fourth quarter 2005, but in the last two years has been related with the fact that price in dollars are being recovered strongly. Before the devaluation in 2001, the price per hectoliter used to be more than $50. In fact, in some months of 2000, we sold at an average $56 per hectoliter. After the devaluation in the worst months, we sold at a price of $16 per hectoliter. In 2005, as I mentioned before, we increased the price to $42 per hectoliter. We think that there is still room for increasing, but not as much as we have in the past. In addition, we have control of prices. The government in Argentina trying to impose it. As you know, Argentina has imposed many times in its history, control of price. As you know, it could work for two or three or four or five months. But sooner than later, will increase price again, if the cost increased and if we realize a rare opportunity to increase prices, because of consumer behavior. Summarizing for 2006, I think that we have opportunities to grow both in volume and in price, but not as much as we had in 2005. This is in relation with Argentina.

In relation with Chile, since Brahma was launched in September 2005, we began to spend more money in marketing. In fact, our marketing rate in the beer business in the fourth quarter 2005 was 11.6% compared with 7.5% in the fourth quarter 2004. As you could see we increased our marketing rate by more than four points. We think that 2006 is going to be a year when we are going to spend a lot of money in marketing. This is one of the face of the coin.

The other face that the market size is growing a lot. Having Brahma pushing their profits and spending a lot of money in marketing in Chile. Having our brand spending a lot of money in beer in Chile. More people drink beer, which is very good news. We expect to more than compensate the higher marketing expenditures with the higher volumes we expect to capture during 2006.

How much are you looking in terms of percentage of sales of marketing expenses in 2003 (sic) and in 2006 roughly?

As you know we [inaudible - microphone] to make projections in terms of figures. In 2004 the marketing rate in beer in Chile was 9%. In 2005, it was 10.8%. We expect at least to see the 10.8% in 2006 and probably to increase it a little bit.

Great. Thank you very much.

José Yordán with UBS.

José Yordán: Good morning, Patricio and everyone else. My question was exactly on the same line as the marketing rate. I kind of just strategically, wonder why you are trying to – are increasing the marketing so much. Has anybody asked the question internally – what is wrong with losing five, six, seven points of market share? What is wrong with 80 to 85 if we make much higher profit? It seems to me like you have had the best environment for beer in over 10 years in Chile and your margins are going down. I am not sure that this money is really – that you are getting a return on that marketing investment. Is there any – how long with this be sustained? How – when do you expect to get payback on these investments, if at all?

José Yordán: Thank you José for your questions. We know that we increased our EBITDA margin in June 2005 in a very good scenario. Of course, we expect to increase in the near future our EBITDA margin again. It happens that the circumstances were very favorable – were very convenient for us to increase our marketing expenditures for three reasons. Number one, because we have Brahma coming to the market. It was not a good idea to allow Brahma to make more marketing and not to do more marketing with our brands. This is particularly important in the first placement of a new brand coming in Chile. That is number one. Number two, the price of wine and the price of pisco are particularly high, which is very good for the beer business. Finally, the economy is going – is behaving very well.

We are making – we understand it as an investment because the per capita of beer reached 31 liters in 2005, which is the highest we have had. You know perfectly that the per capita was stable for many years in Chile. That was a big problem for us. We expect the the per capita to grow again importantly during 2006. At the end of the day, we are going to have the same EBITDA margins that we used to have with a higher market and with higher sales. This is going to be very positive for us. I think this is – our strategy and our idea is that it is not a good idea to capture this higher EBITDA margin now and not to spend more marketing. Because if we don't spend more marketing we could lose a lot of market share and not to improve the per capita consumption as we are doing now.

José Yordán: Okay. If I read you correctly in your last answer, the marketing rate for 2006 is going to be over 10%, but not quite the 11.6% you had in the fourth quarter? So maybe a point or a 1.5 point reduction versus the peak levels in the fourth quarter because that was for the first three months of the Brahma launch?

Yes and of course, we have now an idea and a budget. But we keep very flexible to change our budget depending on how the year is – how great the year is doing at CCU and what is happening in the marketplace. But we expect to have more than 10.8%, as I said before and probably less than 11.6.

José Yordán: Oh, more than 10.8?

Yes.

José Yordán: For the entire year? And then what about in 2007? Does it then go back to the 8% normalized rate?

Probably.

José Yordán: Okay. And I guess if I can ask a follow-up on the wine business, your bottled wine exports seem to be falling on a free-fall. On the marketing and San Pedro organization-wise, is there anything happening here that is leading to that big decline in exports? Just in general if you can give us an update on what is happening with the wine business. Last year you made a very high profile hire for that business. I guess we haven't seen much in terms of results from that. Any update there would be helpful.

No, no good news related with VSP or with the wine business. We are changing the management not just in the top level, but also in many of the different areas of Viña San Pedro. The turnaround we would like to make in that wine business has no relation with growing strongly our volumes in the future and reducing costs. Of course, we need to put in sufficient costs. What we will try to do is to increase importantly the size of our business. In the short term, we are suffering because of restructuring we are making in the different departments of the Company. I think that 2006 is not going to be a good year for Viña San Pedro. We are going to put more focus on the fundamentals of the business – growing volumes, growing prices more than in the bottom line. Because again we are putting all of our thoughts in order to grow importantly and to improve the critical mass that we have in this business.

José Yordán: Okay, good. Thanks.

(OPERATOR INSTRUCTIONS) [Rodrigo Martine] with Santander.

Good morning. Most of my questions have been already answered. I want to ask you if, nowadays you have been suffering any shortage of gas coming from Argentina? Or, do you expect that to happen sometime during this year? Of course, that will affect the production gas.

Yes. Thank you Rodrigo for your question. We expect to have restrictions again as we have had in the last two years. In 2004 we had a restriction, in 2005 also. We expect the restrictions for 2006 not to be higher than the ones we had in 2005. When compared to previous years, we expect not to have bad news.

But nowadays do you have some certain shortage? Or you are producing with a complete flow of gas that was expected?

We expect during March to have some restrictions.

Thank you very much.

Mr. Jottar, there are no further questions in our queue at this time. Sir, I'd like to turn the conference back to over to you for additional or closing remarks.

Thank you. CCU's strong position in the categories with a higher growth potential and the positive perspective for the Chilean and Argentine economies make us optimistic about the future of CCU. Finally, again I would like to thank you for attending our conference call. I hope to see you soon.

Thank you. That does conclude today's conference call. Thank you everyone for your participation. Have a great day.