Compania Cervecerias Unidas SA (CCU) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Compania Cervecerias Unidas Second Quarter Earnings Web-based Teleconference.

(OPERATOR INSTRUCTIONS)

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 CCU's Second Quarter 2007 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 results for the second 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 during the quarter. Consolidated volumes increased 4.2%, revenues grew 6.7%, operating income increased 73%, net income grew 86.5% and EBITDA increased 25.3% increasing the margin EBITDA 2.6 percentage points to 17.2%. These positive results are a consequence of better performance in all our business segments in the quarter, based on strong volumes, margins and a controlled cost structure. The Chilean beer business its positive trend in terms of volumes, growing 1.9% in the quarter over the 20.9% growth obtained in the second quarter 2006. In spite of the colder water -- weather, these higher volumes are mainly explained by the premium segment that increased by double-digits, particularly Heineken, Royal Guard and Kunstmann.

During the quarter, operating results grew 13.5% to $14 million and EBITDA expanded by 7.8% to $23 million. During April, we launched a new brand extension of Cristal, Cristal Black Lager, a black beer for the mainstream segment with a toasted aroma and a strong flavor. This new variety of Cristal in addition to the red beer, Cristal Red Ale, launched a year ago.

The Argentine beer business also continued improving its results with increases of $0.4 million in its operating profit and $0.3 million in EBITDA. These good results are based on higher volumes as well as better price in dollar terms. Volumes increased 20.8%, mainly due to the rapid growth in consumption that the Argentine economy is currently experiencing. The highest performing brands were Heineken, Budweiser and Schneider. Prices grew from $43 per hectoliter in the second quarter of 2006 to $48 per hectoliter in this quarter, 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 partially offset the increases in costs that have taken place during 2006.

Our non-alcoholic products segment had a positive performance during the quarter, increasing its operating income by 164.7%. This growth was supported by 4.6% higher average prices and lower per unit direct costs. Nectar continued with its excellent performance, growing volumes by 22% during the quarter. In May we launched Watt's Kids, a new nectar specially targeted for kids, enriched with vitamins and calcium and with no sugar added. Mineral water volumes were mainly affected by the decrease in the flavored water segment.

During the quarter, the wine segment continued improving its results, growing operating income by $2.4 million and EBITDA by $2.5 million. These results were mainly due to higher volumes in Chile and Argentina, low raw material costs and higher prices of Chilean wine exports on Argentine wines. Vina San Pedro will continue focusing on distribution, brand equity creation, wine making and innovation in order to continue improving its results.

In May, Compania Pisquera de Chile entered into a new category, imported rum under the proprietary brand, Sierra Morena. We have since renamed our pisco business as our spirits business. This new product allows us to go into one of the fastest growing categories in Chile in the past several years. We are very satisfied with the results of this new product. After four weeks in the market, Sierra Morena already was the second brand in sales in supermarkets in Chile.

The spirits business had a good performance during the quarter, growing by $1.8 million in its operating income and $2 million in CBDA. These positive results are supported by volumes and prices that increased 3.7% and 5.5% respectively, mainly due to the focus of our subsidiary on premium pisco products and cocktails. The profitability of this segment is expected to continue improving during the year. On one hand, due to the construction of the new bottling plant in Ovalle, which is closer to production and consumption centers and on the other hand, due to lower rate costs this year and the introduction of new products and innovations.

Finally, our confectionery business grew its volumes by 2.9% during this quarter.

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

Thank you. (OPERATOR INSTRUCTIONS) And our first question will come from Reinaldo Santana with Deutsche Bank.

Yes, good morning, Patricio. Good morning, everyone. My first question had to do with beer in Chile. We have seen pricing improving year-over-year. Was there an increase in prices in certain presentations? Or is it all attributable to the mix?

Thank you, Reinaldo, for your question. It's true that the premium segment has been growing at a higher rate than the regular or the mainstream segment and there's some price increases related to this issue. But the main effect of the price increase is that we increased strongly the price of the cans in supermarkets.

We were competing in a very aggressive way in cans in supermarkets one year ago and that price competition was over. As you know, we are in the middle of a high inflation period considering the experience of still in the last year where we're having inflation by 1% in the last two months. Because of that we think that we will probably increase prices again in the third quarter. Definitely in cans and we are evaluating if also in other packaging.

Great. And has the competition become more aggressive in certain channels? Or certain presentations as of recent?

No, no. No changes regarding this. And ,of course, they compete always aggressively and they are a very good company and a very strong competitor. But there are no changes in how aggressive they have been competing in this quarter compared with previous quarters.

Okay. Great. And one final question, could you talk about your entrance in purified water and also iced tea please?

Yes. I mean, as you know, we -- our purpose is to participate in any kind of beverage in Chile. And there are some pending areas where we're not participating and rum was one of them and we launched our own brand, as I said in my introduction, a few weeks ago. We have a pending issue regarding purified water and also tea. And we are prepared to launch -- to enter into these two categories during this year.

And so -- and always, our strategy was when we enter into a new product or a new category is to have a very good product quality, to have a very good brand. It means all to extend brands, or to extend an existing brands in some cases or to spend a lot of money in marketing behind the new launching and to make a good job in terms of distribution. And these three things, quality, marketing or good brand and distribution are going to behind the two projects, purified water and tea.

Okay. Great. Thank you, Patricio.

Thank you Reinaldo.

(OPERATOR INSTRUCTIONS) Moving on, we'll go to Jose Yordan with UBS.

Hi, good morning, Patricio and everyone. Just I have a couple of questions. One, talking about the water business, it hasn't been doing that well in terms of volumes or prices lately and if you can kind of run us through why -- what's going on there and how the entry into the other categories -- how you expect to stop any cannibalization from -- across the existing brands?

Yes. Thank you, Jose for your question. The per capita of mineral water today in Chile is around nine liters, including mineral water without flavor and mineral water with flavor. 80% is represented by mineral waters without flavor and 20%, roughly, by mineral waters with flavor. This is the mineral water segment. On the other hand, we have the purified segment, where the per capita is something like five liters per capita, 10 plus 5 is 15 liters per capita of water.

The fastest growing segment today is the purified water, which is much cheaper than the mineral water category. And according to our survey, people are beginning to understand day after day, the difference between a mineral water and a purified water.

Margins in the purified water are smaller because the price is small on one hand but are higher because the transportation costs are smaller because you could bottle a purified water in any part of Chile. But in the case of mineral water, you need to bottle in the source and you need to send the product from the source to the rest of Chile.

If you put those things together, the margins of the mineral water are still much higher than the purified water. Then when we enter into this category, we need to be careful to capture new consumers or new locations of consumption and not to cannibalize the mineral water business. And we are preparing our strategy related to this point.

And finally, regarding volumes in the mineral water business, the mineral water without flavors is growing at a very interesting rate. But the flavor segment, in the very beginning when we launched it two years ago, was very successful, volumes were huge, and they are still very high, but not as high as in the beginning and we are decreasing volumes a little bit. And I think the reasons are, number one, we are receiving some competition from some flavored purified waters. Number two, when you launch these kinds of products, everybody drinks and tries the product, but then not everybody continues consuming those products.

And finally according to some surveys we have made, the launch of Coca-Cola Zero has damaged us because some consumers have moved from flavored mineral waters to Coca-Cola Zero. But this is -- that is, Jose.

Okay. Great. Thanks.

(OPERATOR INSTRUCTIONS) Our next question will come from Celso Sanchez with Citigroup.

Hi. Good afternoon. I'm just wondering if you can give us a better perspective on the complexity of your beer portfolio in Chile? Obviously, as you offer more options, that's a big boost to, depending on the season I suppose, of where you see your pricing algorithm, either volumes and/or mix with the new launches of Cristal Black Lager and so forth? Do you see this as something that you'll continue -- that you'll expect to have continuous evolution? Or do you see more of an in and out approach where you'll try something for a season and then maybe try a different line extension? I'm just wondering is there a structural increase that they use and how might that affect the structural profitability of the business going forward in your view?

Of course. Thank you, Celso for your question. We think that the portfolio we have now, it's a very complete portfolio in order to deal with all the needs -- the different need states of the beer consumers in Chile. Are we going to innovate in the future? Probably. But a little bit, very few innovations. I think we have 90% or 95% portfolio, we won't. And there's different need states, which are well attended by our company.

In the case of the premium segment, we have some products, which are very premium, like Kunstmann and Austral dealing with the to-feel-confident need state. Then we have regular premium products like Budweiser, Heineken and Royal Guard leading with the more seduction, show off need state. And then we have two mainstream brands, which are Cristal and Escudo. Cristal has more than 50% market share, 62, in fact. And it's important for us to keep Cristal as a 50% market share brand, not to itemize our portfolio so much and to keep economies of scale and the strength of one brand like Cristal.

But it's true Cristal and Escudo are mainstream products, but Cristal has more relation with bonding and congeniality need state, while Escudo has more relation with liberation need state. And also we have one discount brand to cover that segment. I mean this is our portfolio and we expect not to grow it in the future.

In the case of Cristal Red and Cristal Black, they have the purpose to bring new consumers to the category, particularly in wintertime. As you know, the Chilean market's a very seasonal market and volumes in summertime are much higher than the volumes in wintertime. And we have all the capacity installed and all the fixed costs to produce and to sell and to distribute our beers in wintertime. And we think that we have included all -- I mean, we have increased the per capita consumption of beer a lot in the last year from 27 liters to 35 almost in 3 or 4 years. An important part of that has a relation with the fact that increasing the per capita importantly in wintertime. And we have improved the results of our company in the second and the third quarter a lot in the last few years and it has relation in a way in the focus we are putting on this.

I think that shift has actually been very impressive to me. I wondered, do you think -- are you able to divorce a bit more now the relationship between wine prices and beer consumption? Or are they still the way I always thought] to where it's really just a question of you helping drive beer consumption and then it becomes less a function of what wine prices are doing?

Yes. Celso, I mean we are trying to -- our ideal world would be to divorce completely the prices of beer and the prices of wine in terms of volume. And of course the distinct we have made, we have produced a kind of divorce, but the divorce is not a complete divorce. In fact, one of our concerns today is that the price of wine today in Chile is one of the lowest in the last five years. Four years ago the price of wine was 40% or 45% higher than the price of beer. Today, it is practically the same or 5% more.

We think this is going to change in the future because the price of grapes is beginning to grow a lot again as the export side of the business is booming again. But in the next, I would say, 6 to 12 months, we'll face a very cheap wine. And again we have made things to create the divorce. But we are going to suffer a little bit.

Very helpful. Thank you very much.

Thank you.

And we do have a follow-up from Jose Yordan with UBS.

Hi. My question has more to do with your -- with this and going forward. You have a strategic plan, developing a strategic plan for all the way through 2010 at this point. My question was what do you do for an encore? Is there a radical change in the strategy? And will all the new initiatives to implement zero based budgeting and all the other initiatives you're working on, will that be enough to sustain the double-digit EBITDA growth that you've basically had here for the last couple of years? Any sort of flavor you can give us on that would be great.

Thank you Jose. It's a very good question. Too, we have mentioned in the -- many times, we work with strategic plans with a horizon of three years and now we are dealing with the 2005-2007 strategic plan. And since March of this year, we are working all the team and the Board and many people are involved in this, in the preparation for 2008-2010 strategic plan, which I'm going to present to the investor community when it is prepared and approved by the Board.

And there is no changes in strategy in our new strategic plan. There are some particular -- some special focus probably or some emphasis that we are going to put and 2 or 3 elements or 2 or 3 emphasis that we're going to have in our new strategic plan. Number one, innovation and number two, cost structure. We think that innovation has been there for awhile and we have been innovating for many years. But we think that in some categories, in my previous answer I said that we have not many new innovations in the case of beer.

But in the other categories, there is also innovations in beer, we think that we need to innovate much more in the future. There are many needs and we have opportunities there. When we innovate a lot and when you decide to launch products for neees, one thing is for sure, complexity and costs increase. The real challenge is how to keep complexity, how to keep costs under control and at the same time how to innovate.

And the second challenge is to innovate only with very high margin products and to launch a product for a need with a margin not very attractive is definitely a bad idea. And margins of the launching should be at least 50% higher than margins of existing products. This is the best remedy to the costs and complexity. This is one of the elements we're going to consider in our new strategic plan.

The other one is cost structure. We are going to -- we are beginning to work -- I mean, we have a plan under the name of [Maxeo], which means "maximum excelencia operacional" or maximum operational excellence and we have different dimensions in which we're going to work. Zero based budgeting is one of them. But we have others. And we expect to make our structure much more efficient.

At the same time we expect the economies of Chile and Argentina to continue growing during the next three years. And a combination of a good economy, innovation and cost control, we expect will allow us to keep good results. But, of course, as always, we don't make official projections or estimations on our EBITDA or on our results for the future.

Okay. Great. Thanks a lot.

There are no further questions. At this time, I would like to turn it back to our presenter for any additional or closing remarks.

We are very satisfied with the results obtained during the quarter as I said before. And we are optimistic regarding to see further developments during this year and during the next strategic plan period. I would like to thank all you for attending our conference call and I hope to see you soon.

That does conclude today's conference. We'd like to thank you all for your participation.