Compania Cervecerias Unidas SA (CCU) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you so much for your patience. We'd like to welcome you to the Compania Cervecerias Unidas Third Quarter Earnings Web based Teleconference. [OPERATOR INSTRUCTIONS] And now, for opening remarks. I'd like to turn the conference over to Mr. Patricio Jottar, the Chief Executive Officer. Please go ahead.

Good afternoon and thank you for attending CCU's Third Quarter 2006 Conference Call. I'm here with Ricardo Reyes, CCU's Chief Financial Officer, Luis Eduardo Bravo our IR Manager and analyst Macarena Gili. You have received a copy of the company's result for the third quarter 2006. On this occasion I would like to comment on the results of each business segment and also address some new developments during the quarter. After these remarks I will gladly answer any questions you may have.

During the third quarter of 2006, Consolidated's revenues increased 8.7%, reaching $233.2 million. Operating income grew 47.6% to $27.9 million. And EBITDA rose by 23% to $47.1 million.

During the quarter, all business segments showed improvement in their [inaudible - accent]. With the exception of the soft drinks, nectars and mineral water segments, which was negatively effected, mostly attributed to higher sugar costs.

We are particularly satisfied with the good results obtained by the Chilean beer business. During the quarter, operating results grew by 40.3% to $18.8 million, and EBITDA expanded by 19.8% to $27.1 million. This growth was supported by volume increases of 22.1%, mainly the result of additional investment in marketing, merited by the competitive environment we find ourselves in as well as positive economic trends and generally good weather conditions. The brands that best performed were Cristal, Escudo, Heineken, Budweiser and Kuntsmann.

The premium segment grew 26.2% during the quarter. Our average price decreased 3.1% during the third quarter 2006 in spite of the higher mix of one-way products. To address this issue we increased prices of canned beer 7.2% in supermarkets during September.

The Argentine sea of business continued improving its results with increases of $1.2 million and $1.8 million in operating profit and EBITDA, respectively. These good results are based on higher volumes and better price. Prices increased from $41 per hectoliter in the third quarter 2005 to $45 per hectoliter in the third quarter of 2006. The highest performing brands were Heineken, Budweiser and Schneider.

The volume performance of our [anapolic] product segment were very encouraging. Soft drink, nectar and mineral water grew by 14, 20.9 and 5.2% respectively. Nevertheless, the profitability of this segment was temporarily effected by higher raw material costs, mainly sugar, lower adjustments related to bottle warranties and the lack of correction of price [north] to recover inflation.

In August we launched a new proprietary one-way bottle for Bilz and Pap. And in September we introduced a light version of Canada Dry Limon Soda, which was very well received by consumers.

The wine segment has picked up, improving it's operating results and EBITDA by 65.4 and 37% to $3.2 million and $5.7 million respectively. These results were mainly due to lower raw material costs, especially for mass consumption wines and packaging as well as lower SG&A expenses as a consequence of the announced rationalization plan undertakens by [vino san pedro] to adapt its sales to the new market conditions.

The pisco business continued in hastening its results during the quarter. Its operating profit and EBITDA increased - improved by $1.9 million and $2 million respectively. These results were mainly due to better prices and a higher mix premium product whose sales volume grew 41.7% during the quarter.

Compania Pisquera de Chile has already implemented the use of CCU's shared services. Additionally, other measures have been taken to continue improving profitability through cost rationalization initiatives, such as the new layout production facilities and lower cost of grapes, which are projected to continue decreasing to historic levels. Most of the benefits of this initiative should be captured by the fourth quarter 2007 and in full during 2008.

Finally, our confectionary business continued growing during the third quarter 2006 with volumes up by 14.7% during the period.

Having touched on the highlights of the third quarter 2006 as well as some other recent developments, I will now be pleased to answer any questions you may have.

Thank you Mr. Jottar. [OPERATOR INSTRUCTIONS] We have a question from Robert Ford with Merrill Lynch.

Hey, good morning everybody. Congratulations on the quarter, Patricio. I had a question with respect to current dynamics. Could you give us a summary of what your volume run rates are now, both in Chile as well as Argentina? And if you could run us through pricing as well, particularly in light of the recent increase in cans in supermarkets in September.

Thank you Robert for your question and for congratulating us. You mentioned the volume turns in Chile have been particularly strong, we grew our volumes, as I said, by 22% during the quarter and we expect to keep a very good growth rate in the rest of the year. Not necessarily 22% because it's a very high - it's a very high figure but we expect to keep the average growth we have had during the year to [underlating] 10% in the rest of the and we are in line - we have analyzed some trends behind consumer patterns, especially among young adults, and we expect to have a good 2007.

Of course we do not expect to grow our volumes by 15% again, but we expect an interesting rate of growing during 2007.

We have increased prices of canned beer many times during the year. In the worst moment a 6 pack of Cristal, which is our mainstream brand, was sold at a price of 1,200 Chilean pesos in supermarket. This is price to consumer. It's a little bit more than $2,1,200 pesos. Today, we're selling at - after the increase we made in September, at a price to consumer of 1,600 pesos, which is 400 pesos more or 35%. This is in a period of three or four months and volumes have not declined because of that. And we expect to increase prices of one-way products a little bit more during 2007. And in putting all together, we expect to keep our margins, I mean direct margins at this price minus direct costs during 2007, but not because of increasing the return to repackaging, but for increasing one way packaging more than at the current level in one time, its increase - to increase the percentage of our sales represented by premium products and the pick up of some innovations we have - we are working in for 2007.

Then we feel comfortable in 2007 still at keeping a good rate of growth in volumes to keep good margins and we expect to have a more rational scenario in terms of marketing expense. And then putting all together, we're optimistic for 2007.

The case of Argentina, I mean - as you know, it's not difficult to increase prices because the government in Argentina is stressing a lot to the companies not to -- not to increase prices and it's not easy to go by gains, this pressure. Until now, we have been able to increase prices more than inflation and to recover margins. 2007 not necessary - it's not going to be necessarily a good year for that pur - for that purpose. And we have cost pressures on one hand. On the other hand we expected to increase price a little bit, but less than inflation.

In terms of volumes, the trend is rather good during 2006 and we expect it to be better in 2007 because as prices are going to increase less than inflation, there is going to be a cheap alternative and it's going to be - it's going to be represented by higher volumes.

But is -- can I just ask this, is [Andev] following the price increase that you made in cans in September. And then, when you look at the quarter it's - there was so much operating leverage, particularly in Chilean beer. I was curious as to whether or not marketing spend or investment declined as a percentage of sales. And if it didn't, do you anticipate reducing it or making further reductions in the future as the competitive dynamic eases in Chile?

Yes. No, until now Andev didn't follow. They are selling the 6 pack of cans of [Gramma] which is the beer, those are the private prices to Cristal, 100 pesos or almost $0.20 of dollars, cheaper than [Cecile]. This is prices to consumer. But the difference is very little. This is no more than 6% and - I mean, it has not produce problems to us.

In terms of marketing expenditures, the rate of market - I mean the marketing rate was 10.3% in quarter 3 2006 compared with 11.5 in quarter 3 2005. This is 1.2% less. And we expect to even - to decrease it - to decrease it a little bit during 2007 as I said before.

And what's - what's a more normalized rate? Is 9% -- 9% is what I recall, but I wasn't really sure what a normalized marketing investment was for you.

Yes, long term it could be 9%.

Great. Thank you very much and congratulations again, Patricio.

Thank you very much.

There are no further questions in our queue. [OPERATOR INSTRUCTIONS]

Yes. I'd like to say again that we are satisfied with the sum growth of our traditional domestic business in 2005 and in the first nine months of 2006. And this makes us optimistic regarding CCU's further development in upcoming months. 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 conference call. Thank you everyone for your participation, and have a great day.