Compania Cervecerias Unidas SA (CCU) 2007 Q1 法說會逐字稿

Good day everyone and welcome to the Compania Cervecerias Unidas Conference Call, First Quarter Earnings web-based teleconference. This conference is being recorded. At this time, I would like to turn the conference over to Mr. Patricio Jottar, the Chief Executive Officer. Please go ahead, sir.

Good afternoon and thank you for attending the first quarter 2007 Conference Call. I am 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 results for the first quarter 2007. 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.

We are very satisfied with the Company's results within the quarter. Consolidated volumes increased 8%, revenues grew 11.7%, operating income increased 26.6%, net income grew 21.5% and EBITDA increased 19.1%, reaching a margin EBITDA of 28.4%, 1.8 percentage points higher than in the first quarter of 2006. These positive results are a consequence of a better performance in all of our business segments during the quarter, based on strong volumes, margins and a controlled cost structure.

Brazilian Beer business continued its positive trend in terms of volumes growing 5.9% in the quarter, mainly explained by the premium segment that increased more than 30%. Standing out Heineken, Royal Guard, Budweiser, Austral and [Consumen]. During the first quarter, operating results grew by 17.5% to $45m and EBITDA expanded by 13.8% to $53m.

In April, we launched a new brand extension of Cristal. Cristal Black Lager, a black beer to -- for the native segment with toasted aroma and a strong flavor. The Argentine beer business also continued improving results with increases of $1.5m and $1.6m in operating profits and EBITDA respectively. These good results are based on higher volumes as well as better prices. Volumes increased 13.5%, mainly due to a more stable Argentine economy and higher exports. The highest performing brands were Heineken and Budweiser. Prices grew from $43 per hectoliter in the first quarter of 2006 to $47 hectoliter in the first quarter of 2007 due to a higher mix of premium products and one-way packaging in addition to the price increase of approximately 4% carried out last January to potentially offset the increases in costs that took place during 2006. In January, we began the production of Schneider in the Lujan plan near Buenos Aires, following the brewing agreement with ICSA.

Our non-alcoholic product segment had a positive performance during the quarter, increasing the total net income by 33.8%. This growth was supported by 7.1% higher volumes in all categories and 2.8% higher prices. In the case of soft drinks, volume increased 7.2%, standing out assortments of Limon Soda, Bilz & Pap and Pepsi in addition to the introduction of Kem Slice in January, a tropical fruit soft drink produced in association with PepsiCo.

Nectar volumes grew 31.1%, continuing with its excellent performance following the agreement with Watt's that allow us to own half of the Watt's brands for juices and milk-based beverages. Additionally, we launched in February SoBe Adrenaline Rush, a PepsiCo energy drink that will increase our portfolio of [consumption] products, a category with high-growth potential.

During the quarter, the wine segment continued improving its results, growing operating income by $2.3m and EBITDA by $2.5m. These results were mainly due to higher volumes in Chile and in Argentina, lower raw materials costs, especially for mass consumption wines and the lower cost of expenses resulting from the rationalization plan that Vina San Pedro undertook to adapt sales to new market conditions. Vina San Pedro will continue focusing on distribution, brand value creation, wine making and innovation in order to continue improving its results.

The Pisco business had an excellent performance during the quarter, multiplying by three and by two, its operating income and EBITDA respectively. These good results are supported by volumes and by prices that increased 11.6% and 3.3% respectively. Volume growth is explained by premium products and cost base. The profitability of this segment expects to continue improving during the year and the following year, on the one hand, due to the construction of the new bottling plant in Avaya, which is closer to production and consumption centers. And on the other, due to lower base costs for this year and the introduction of new products and innovations.

Finally, our Confectionery business grew its volumes by 18.5% in the quarter. We began the construction of a new production facility in the city of [Estalca], which will replace the old factory, which is now more than 100 years old.

Having touched on the highlights of the first quarter of 2007 as well as some other recent developments, I will now be pleased to answer any questions that you may have.

[OPERATOR INSTRUCTIONS]. And we'll first hear from Diego Celedon of Santander Bank.

Hi Patricio. Well first of all congratulations on the results. And my first question is regarding the premium beer category in Chile. You mentioned the strong volume growth that this segment has hand in the last time. And I wanted to know if you can give us your view on the outlook for the segment in terms of volume and if you can tell us roughly what's the magnitude of the price premium of this category to the mainstream brand?

Thank you Diego for your question. The premium segment is growing a lot. The same thing happened in the Wine business, in the Pisco business and it's a trend among different categories. This price is -- and we expect this trend to continue in the future. And at the same time, this trend means not just more price or lower margins, but also more consumption because in some cases premium products replace regular ranging products, but in other cases, premium products will be sent to new locations of consumption. Because as is done, in some locations, where traditionally beer is not drunk, the premium price is 30% and the margin, it's also 30% above the same margin -- also the margin of the mainstream products.

Yes. Yes. Great. Thanks a lot. And my second question is if we have an estimation of the industry volume growth in the Chilean beer market for the quarter?

Yes, but we never make official estimations and we never provide a status. Of course we have our own estimations. It is important to remember that the second quarter of 2006 and in the second quarter of 2000 -- I'm sorry, excuse me. The second quarter of 2006 and the third quarter of 2006 volumes grew a lot, as you know. I mean the press releases are out there. It showed that margins were not very good because we were in a small war price against the brands in some segments and some channels on one hand and that our cost factor was rather high because we're spending more money in marketing than usual in this business.

Of course we are making our best efforts to grow compared with the volumes of 2006. That is not going to be easy because again volume increase was very, very high. As I mentioned before, we launched a new brand extension of Cristal, which is Cristal Black Lager, which is a very good product for winter, for winter time, and we are preparing many other actions in order to keep our volumes in a good shape in the next two quarters. But I need to be realistic and it's important to see what's happening in 2006.

But we expect to have better margins and a lower cost structure. The combination of these three elements in terms of profits, I mean, just to make the rationalities. But we remain optimistic about the development of our Beer business in the future.

Okay. Great. Thank you. And my final question is regarding the SG&A expenses. In the -- in Chile, we saw a strong decline in the Beer division and I just wanted to know how much of that decline is due to lower marketing expenses and in your opinion how can this continue in the upcoming quarters?

To keep the brand value, the brand equity for our brands in a very good and high shape is the first priority for us. We will never decrease our expenses if we could generate or if it could be detrimental for the value of our brands. And I could say that the value of our beer performance today is in a very good shape and very tight.

Happens just we are decreasing the marketing rate because the marketing rate in 2006 was higher than the normal, than the regular or marketing rate for other people like beer in Chile. Then we are going to have a lower marketing rate in 2007 compared to 2006, yes. But it's going to be good enough to keep the brand equity for our brands.

Okay. Great. Thanks a lot.

Thank you.

And next we'll hear from Andrea Teixeira of JP Morgan.

Hi. Hello everyone. Good afternoon Patricio, Ricardo and Luis. Basically -- well, congratulations on the results also. Basically my question is more of a follow up regarding SG&A. Just so I understand, last year we had of course the World Cup, but sometimes you have some smoothening of marketing expenses and otherwise. So should we see this trend of declining SG&A going forward in 2007? That is my first question.

Thank you. Thank you, Andrea for your question. As I said before the marketing rate is going to be lower in -- that the marketing rate is going to be lower in our day to day in 2007 compared with 2006. This is number one.

Number two, probably you saw some non-operating results or negative results in the first quarter of 2005 and this is related to the fact that we -- this means the number of employees of the Company on March 30. Most of the seven statements were provisional December 30. As I mentioned before, but some of them were paid in March because finally we decreased a higher number of employees than we expected in December of 2006. And we'll benefit from those savings beginning in April 2007.

On the other hand we are taking other measures in order to control the cost structure. Because again the best combination of the gross profits is to keep volumes in a good shape, to keep margins in a good shape and to have the cost structure under control. And this is what we expect to have for the rest of the year.

So the marketing growth isn't with the pressures in costs in general while they should still improve year on year sequentially? Not divisionally. I mean year on year?

Yes, I mean I cannot to make official projections regarding margins, but costs are on our focus in the rest of the year.

And also interested Patricio in terms of your comments regarding wine. We have been factoring in better costs because the grapes were -- and you talked about grapes are cheaper now and you talked about also the restructuring and the cost savings and expense savings program that you have been implementing at the winery. Can you talk about in general if you see the same trends for 2007? But I know that you cannot make any estimates, but in general for the crop for when you're going to cycle 2008 crop, if you're looking forward, you're looking for the same trend that we saw or in 2007? Or are we going to go back to those levels of 2005 and 2006?

It's difficult to say, Andrea, but generally we think that the consolidated 2008 is going to be slightly higher than it was in 2007. But finally and in the long term profitability of the Wine business is much more related with our ability to grow our volumes, our prices and our margins. I mean now we are having a short term -- now we have a short term disadvantage regarding the exchange rate and a short term advantage regarding the cost of the grapes. But this is part of the business. I mean in the next many years, in the next 20 years, we are going to have some periods with good exchange rates and bad exchange rates, some periods where the grapes are at a high costs and some periods where the grapes are at a low cost. But at the end of the day our ability to build a good business in the future depends on our ability to create brands, to improve our portfolio, to develop a good distribution network, to have a good wine making technology and to grow our volumes and prices. And this is finally where our long term focus is. And you saw the figures in the first quarter review, which is good, because we broke the trend. But we need to grow much more than that. This is our talent. And of course it's not easy, but we are doing our best effort and we are aligning all of our trends in order to get that in the future.

And lastly, regarding Argentina. We've seen a lot of comments about [Heisenbach]. Is there anything that you would change in your strategy if that was to happen in Argentina?

We have read the same things you have read and I prefer not to make comments on unofficial information.

Okay, Patricio. Thank you very much and again congratulations on the results.

Okay. Thank you very much, Andrea.

Thank you. Next we'll hear from Reinaldo Santana of Deutsche Bank.

Yes. Good morning Patricio. Congratulations on the results as well. Most of my questions have been already answered. However, I have an additional one. Could you comment on the evolution of the rationalization plan of Vina San Pedro? Now what is the completion period to this point and do you see further room for improvement going forward? Thank you.

Thank you Reinaldo for your question. It's clear that we have made a very important rationalization plan. But on the other hand, we are investing much more money in brand equity and improving our distribution network. When you analyze SG&A for the first quarter, in the case of Vina San Pedro they're growing at something like 7%. But behind that there is a very important reduction in local costs and it's true an increase in marketing costs and distribution expenses, in order to create a better future in terms of the volumes and margins, which is what I answered before to Andrea. And again this is our -- this is where we are putting now our efforts and this is the biggest challenge for the future of Vina San Pedro.

I think it's important to discuss and we are doing that. But we are not going to make San Pedro a profitable operation just by reducing costs. We need to grow, importantly, and I'd say the way to evaluate if we are doing a very good job or not in Vina San Pedro is to analyze what happens with our volumes and with our price in the future. If we are able to grow volume and prices more than the industry, it means that we are moving in the right direction because this is what we want to do.

Anything further, Mr. Santana?

No.

Next we'll hear from Robert Ford.

Yes, good morning everybody and congratulations again, Patricio, Ricardo and Luis as well. It's very impressive across virtually every line of business. The one thing I was surprised with was the Confectionery business. And I know it's -- there's some logistics issues there too. And I don't know how much of this is related to Avaya, but can you explain a little bit more with respect to the decline in profitability and your other interests in confectionery logistics? And specifically -- and how we should perhaps model that going forward? And where do the opportunities lie in that business?

Yes. Thank you. Thank you, Bob, for your question. I have mentioned that now there are opportunities. The Confectionery business for us today is not a business, but a learning process. And I think the size of the Confectionery business is too small for CCU that if we made a very good profit, a very good bad profit, our consolidated results almost keep unchanged. But it's a learning process because of the value to each industry, the sweet industry in Chile. And we are learning how to use -- how to adapt our capabilities in ready-to-eat in order to operate in the -- [inaudible] in order to operate in ready-to-eat.

The learning process has been very satisfactory for us until now when we bought [Caras]. Caras had something like 500 or 600 employees. Today we have 250 employees. We have reduced by 6% the number of employees. At the same time, we have multiplied by -- we have multiplied almost by two, the total volumes. But again -- and besides also that, we have improved them a little bit sometimes and this is then a little bit in other opportunities. But it's not our focus. Our focus is the learning process and then having the results. But it's not time to say that we have the capabilities to strongly attack the vertical industry. It's not -- and we have not done this conclusion yet. But we are very happy with the results until now.

And of course when we decide to do something much more important in the ready-to-eat industry, we will announce it and the reason why it's going to be that learning process is concluded and we have come to the conclusion that we are able to do that.

And Patricio when you decide to move to the ready-to-eat industry, is it a buy decision or is it a build decision?

We don't have the answer to this question yet, Bob. But both alternatives are going to be open and we'll analyze the best of them. But of course to buy something could be an alternative, definitely. But I think it's not the time to do something important.

And from a learning perspective as well as from an execution perspective in terms of pre-sale and the modifications you're making there, when do you think you'll be at a point where you will be comfortable proceeding with a buy or build decision?

Very good question. I think that during 2008, in the next 12 to 18 months, that we should have a much more clear conclusion coming from our learning process.

Great. That's very useful. Thanks again and again congratulations.

Thank you very much.

Jose Yordan with UBS.

Hi. Good afternoon Patricio and everyone. A quick question on the pricing of beer. It was up 3.5% in real terms a little ahead of expectations. Is that all mix, or a price increase, or a combination of the two?

Yes, thank you Jose for your question. It's a combination of two items. Number one, we are discounting strongly in cans in supermarket in the first half of 2006. And now we have increased importantly the price of cans in supermarkets. At the same time, we have not changed the price of the liter returnable in Limon Tops. This is reason number one.

Reason number two is that the increase of the premium category, we think that we have still room to grow our price and our margins through increasing can prices on one hand and through increases in the size of the premium segment. Without changing the price of the liter returnable in Limon Tops. I would say that in the next 12 months this could be the strategy. But again, I mean the market is very flexible and we are also preferred to change our price strategies depending on what happens. But that's at least what we expect to happen.

So sometime by year-end, ahead of the summer maybe is when you will be ready to do the change in the main one-liter package if I read what you're saying correctly?

I would say that 2007 is not the year to do that. But of course we could change the distribution at any moment if market conditions advise us to change. But we -- today we expect not to change the price of returnable liters for the rest of the year.

Okay. Thanks. And just a follow up on the marketing rate question. In the past it had been a normalized rate had been about 8%. I think at one point you went up to 14% or so. Given the changes that have happened in terms of the huge growth in the bottle and the top line of course and the actual small decline here in the absolute terms, more or less what marketing rate are you at now in the Beer business in Chile?

Well I think that some -- I mean in the first quarter of 2007 it was 8.8%. And the first quarter 2006 was 11.2%. But how do you say, a long term 8 to 9% marketing rate we think is a very reasonable long-term marketing rate.

Okay. Thanks a lot.

Thank you Jose.

[OPERATOR INSTRUCTIONS]. Celso Sanchez with Citigroup.

Hi. Good afternoon. Could you please give us a bit of color on the competitive pricing environment in Chile and how much you think that's going to factor in the ability to not just reduce the discounts, but also potentially in the ability, depending the channel of course, to shift towards the higher margin products going forward? That's my first question.

Thank you, Celso for your question. I mean, it's difficult to know and to understand how the environment is going to be seen in the future because today we're living in a very -- in a peaceful scenario and tomorrow we could be in the middle of a war. But having said that, I think that -- and we expect a very, very rational behavior during -- in the future. Because at the end of the day, when prices go down. When pricing goes down and our competition has not increased their market share. At the end of the day our competitor has increased its market share when they invest in marketing and when they invest in the point of sales and know when they cut prices. And then I expect them to behave rationally. Probably they -- they will continue gaining some market share in the future. They have just launched [telecline] Chile, which is a very good brand. And I think that they are going to make a good marketing campaign and a good point of sale effort behind the brand. And of course they will add that they will take some share in the premium segment because it's a good brand.

And if this is then the case, the price scenario for the future is comfortable. But again it's impossible to know exactly what is going to happen.

Thank you. And if I could follow-up with the consumption occasion point you raised earlier, which I thought was very interesting. Could you give us a bit more color on what kind of occasions, some examples of the occasions we're talking about? And also some of the beverages that are replaced or displaced by increasing consumption, especially in the premium brands?

Yes. We think that in -- four things. Number one, there are some I would say more elegant occasions or more sophisticated occasions where beer is -- I mean it's not present in the past. And now it's much more common to see beer, of course the premiums products of beer, in those occasions. So example in the past, it was very unusual to have a beer in a wedding, in an important wedding party. And today it's much more usual to see beer in those occasions. Number one.

Number two, in some occasions of consumption, for example having -- to have dinner in a restaurant, in a good restaurant in the night, we have measured that beer is replacing wine from -- in some occasions. And those things are very good for us and very good for the category.

Just to finish up on that topic. Is there an educational opportunity or can you have an educational opportunity, not so much for the consumer to understand that the value of having a good beer with a good meal or a sophisticated occasion, but also with educating the service establishments and the wait staff, is that something that's part of the strategy yet? Or might be going forward?

No, no, definitely. This is definitely part of our strategy. That's also the case of [Consumen], which is the most premium of all of the brands we have. The price premium in some segments of [Consumen] is 145%. The price premium, it means that the price [inaudible] and the price [inaudible] of Consumen is 235.

I would say that more than 50% of the volume of [Consumen] are shop hotels. We do not exclude from the [inaudible] that the average percentage of takes in our total portfolio is something like 6 to 20% and it depends on the demand of the year.

In the case of [Consumen], it's 50%. And the reason of that is that we -- I mean in some restaurants are learning that they could serve a very good chop and a very good case of a very sophisticated beer with very good margins for them. And of course it helps a lot to increase the beer culture in our country. And we do a very -- I would say very detailed and sophisticated job regarding this issue.

Great. Thank you very much.

Thank you.

And Mr. Jottar, there appears there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

Okay. Again, we are very satisfied with our results obtained during the quarter and optimistic regarding CCU's further development during the year. I would like to thank you, all of you for attending our conference call and I hope to see you soon.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.