Compania Cervecerias Unidas SA (CCU) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the CCU Fourth Quarter Results Conference Call. During today's presentation, all parties will be on a listen-only mode. Following the presentation, the conference will be open for questions and answers. As a reminder, today's conference call is being recorded, Tuesday, February 05, 2008. I would now like to turn the call over to Patricio Jottar, CEO. Please go ahead sir.

Good afternoon and thank you for attending CCU's fourth 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 fourth quarter of 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 pleased with the Company's results during the quarter. Consolidated volumes increased 6.9%, revenues grew 5.4%, operating income increased 6.4%, EBITDA grew 5%, and net income increased 44.3%, mainly explained by the non-recurring gain related to the agreement with Nestle in the water business.

These results are especially significant considering the unusual high inflation rate in Chile, which reached 7.8%. According to Chilean [gov], comparative figures must be adjusted by inflation. Nonetheless, we are able to grow our results in real terms.

The Chilean beer business continued its positive trend in terms of volumes, increasing 5% in the quarter, in spite of the 6.5% nominal price increase carried out last September to partially offset the effects of inflation and higher raw material and energy costs.

During the quarter, operational results decreased by 1.1% to $50 million and EBITDA was almost flat reaching $60 million, mainly due to the cost pressures previously mentioned. The good performance of the premium segment continued growing 24% during the quarter. The year 2007 marked a new record for Beer Chile with more than 4.9 million hectoliters sold, 4.3% more than in 2006.

The Argentine beer business increased its volumes 7.8%. Its results in Chilean pesos are distorted due to inflation and exchange rate variations during the quarter. Nevertheless, in U.S. dollar terms, its revenues grew by 27.8% and its operating income by 3.9%. Higher revenues are explained by the higher sales volumes previously mentioned and 17.8% higher prices in dollar terms. During December, we increased nominal prices to partially offset the rising cost environment that is facing our operation in Argentina.

On October 4th, we executed an agreement to purchase the Argentine brewery, ICSA, subject to prior approval by the Argentine Antitrust Commission. Currently, we are waiting for its resolution. ICSA owns, among other assets, Bieckert, Palermo, and Imperial beer brands, which together represents an estimated 5.8% of the Argentine beer market, and a brewery in Lujan, Buenos Aires, with a nominal production capacity of 2.7 million hectoliters per year.

Our non-alcoholic product segment had a positive performance during the quarter, increasing its operating income by 24.8%. This growth was supported mainly by higher sales volumes in all categories and lower per-unit costs. Soft drinks volumes grew 9.8%, nectar by 14.2%, and mineral water by 4.6%. In November, we launched Lipton Iced Tea, locally produced under license of PepsiCo. During the quarter, we increased 3% nominal prices to partially offset the higher inflation rate.

During the quarter, the wine segment continued improving its results, growing operating income by $2.3 million and EBITDA by 79.1%. These results were mainly due to lower raw material costs on a consolidated structure.

In December, Vina San Pedro general manager resigned and was replaced by Javier Bitar. Javier was Vina San Pedro's Chief Operating Officer and previously was Vina Santa Helena's General Manager. Vina San Pedro will continue focusing on distribution, brand equity creation, wine making, and innovation in order to cope with the challenging business environment.

The spirits business also had a positive performance during the quarter, growing its operating income by 44.4% and its EBITDA by 38.9%. These results were a consequence of the focus of Compania Pisquera de Chile on premium pisco products and cocktails, the operation of a new production facility in Hawaii, in addition to the good performance of our rum, Sierra Morena launched last May. In our confectionery business, volumes slightly decreased during the quarter, mainly due to the rationalization in the number of SKUs and price increases.

Finally, on December 5, we through our subsidiary, Embotelladora Chilenas Unidas, ECUSA, entered into an association with Nestle Waters, a subsidiary of Nestle to participate in the ownership of Aguas CCU-Nestle Chile S.A. This new company, a subsidiary of ECUSA, owns the assets of CCU's water business and was granted the exclusive license to produce the Nestle Pure Life brand in Chile. Currently, Nestle Waters Chile S.A. owns 20% of this new company and has the option to buy an additional 29.9% during an 18-month period. This transaction generated a non-recurring gain of $24 million after taxes for CCU in the fourth quarter.

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

Thank you, sir. (OPERATOR INSTRUCTIONS). First question comes from the line of Bob Ford with Merrill Lynch. Please go ahead.

Hey, good morning everybody. Good morning, Patricio. I had a question with respect to the CSD business. Tremendous performance, you had mentioned that you launched the Lipton Iced Tea brand in the quarter. But, what else is behind that very strong increase in CSDs in Chile?

Thank you, Bob, for your question. The last many years, we have been improving the portfolio of our soft drink division of our non-alcoholic division. On one hand, we are keeping our market share in the soft drink business, which is a business which is not growing a lot and where we see the competition of big brands and where margins are not very good. But, as I said before, on the other hand, we have been improving our position in mineral water, flavor mineral water, nectars, juices, products like Gatorade, other functional products, which are products with high level of caffeine and these kinds of products.

And our last step in this trend was to launch the Lipton Iced Tea, which is an international agreement within PepsiCo and Unilever to produce and distribute the Lipton Iced Tea brand to all the distribution network of PepsiCo. The advantage of all these new products is the margin, because the average margin of all the products I just mentioned are something like 80% to 120% more than the average margin of our soft drink products, and this is, I would say, the main element behind the improvement of our results in the non-alcoholic division.

On the other hand, we are trying to control our cost structure, the price -- the sugar price has been rather stable and has decreased a little bit, which are good news. And also the pet product has not been increasing in spite of the fact that oil is increasing its price. Those are good news for the results of our non-alcoholic division. But, the real answer is -- is the improvement in the margin of our portfolio through this new categories.

Thank you, Patricio. And the revenues also were up 28% for the quarter year-on-year. So, it sounds -- what I think I am hearing, particularly in light of the Nestle deal, is that we should continue to expect momentum to remain strong. It's not just simply channel stuffing of new products and innovation, it's much more substantive than that, is that fair?

Yes, I think that this is fair.

Great. And then with respect to the inflation you referred to, it's been probably most pronounced in Chile than any major market in Latin America now. Can you discuss what the -- what the take-up has been like with respect to the price increases that you have implemented, and how competition has followed, how demand has reacted, and what the outlook might be for additional price increase over the course of the year?

Yes, I mean inflation has been a very complicated phenomenon in our business. As you know, the inflation rate in 2007 was almost 8%, which is totally unusual in Chile. In the last, I don't know, five, seven years, the average inflation rate was 3%, and 8% is almost three times -- three times the average. And it's complicated because as you know, according to Chilean government, we present 2008 results for example in three more months. When we close the quarter, we will be comparing the 2008 figure with the 2007 figures adjusted by inflation.

Then, if we got 100 in terms of revenues in the first quarter of 2007, when -- we get and let's assume that our revenues are 110 (inaudible) in the first quarter of 2008. Instead of increasing 10%, we will show an increase of 2% in our financial reports because we -- because -- but this is Chilean gov -- this is Chilean gov. So, this is point number one.

Point number two is that a part of the inflation rate, which -- which affects most of our costs in Chile, some of the raw materials necessary to produce big (inaudible) has increased a lot, particularly the price of malt and the price of barley has increased by almost 100% in the last -- in the last six months as many commodities in the world, which is our reaction behind these, number one, to control costs, fixed costs; and number two, to increase price and we expected to increase prices in -- we increased prices by 7%, almost 6.5%, in September 2007 and we increased prices again in 2008.

But, we will not increase in all the products and in all the -- in all the SKUs. We are going to put a special focus on premium products on one hand because of the GDP per capita is growing, people are spending more money in premium products in all the different categories and we think that the elasticity in those products is very small. Then, if we increase prices, then demand is not going to suffer.

And also, we will increase prices in one way products and also one way packagings are increasing lot their sales. By doing these two things, we expect to keep the margins on real terms in 2008 compared to 2007. I mean in order to keep the margins on real terms, we need to increase margins by 8% on nominal terms, which is a challenge. But, we expect to -- I mean we think that this is going to happen in 2008. And we think that again that the demand is not going to suffer. The outlook -- the outlook for 2008 in terms of inflation in any case is much more positive than 2007. We expect to have a moderate inflation rate in 2008.

Thank you, Patricio. And then just one last question if I may and that is with respect to the water opportunity, can you mention the size of the -- of the water market for us and the opportunities that you see for the joint venture?

Today, the mineral water business is an 11 liters per capita business in Chile. This is the mineral water business. And the purified water business is a five liters per capita business. Of this five, it could be divided in two different categories, three liters of bottled purified water and two liters are home and office delivery, which is a business where our participation is very small. We have 10% market share in the home and office delivery because we have not put enough focus in the past.

For the future, we expect to -- we expect the per capita to grow in the three categories. We expect the per capita of mineral water to grow a lot, we expect the per capita of bottled purified water to grow a lot, and we expect the home and office delivery business to grow a lot.

We have a very strong position in the mineral water business and with the association with Nestle, we will reinforce our position in the home and office delivery, where Nestle is a leader worldwide and also in the bottled purified water where Nestle is also a leader worldwide and we expect to grow a lot in the future, because of the joint venture with Nestle and because of the fact we are going to put much more focus on these new categories.

And today, you said you are 10% market share in the combined purified water business, is that correct?

No, nothing to combine. Just in home and office delivery. In the purified business, our market share is almost zero. We have some small plants in the north of Chile for tactical reasons, but we are -- I would say that today we are not participating in the bottled purified water, our market share again is almost something like zero, let's say, and something like 10% in the home and office delivery. And we expect to have a leading position in these two segments, in purified water and in home and office delivery in the next three years.

And just to remind me, and I apologize again, in the mineral water business, what's CCU's market share?

Between 65% to 70%.

Great, thank you very much.

Thank you, Bob.

Thank you sir. The next question comes from the line of Diego Celedon with Santander Investment. Please go ahead.

Yes, hi, good morning to everyone. My first question is regarding ICSA's acquisition, what are your expectation in terms of timing to have a ruling of the Argentine authorities there?

Thank you, Diego, for -- thank you, Diego, for your question. As you know, when you go to the antitrust authorities, it is impossible to know the final result. As I have said in the past, we are very optimistic to get a positive answer because we think that what we are presenting to the antitrust commission makes a lot of sense. But, of course, we don't know if we will get positive or negative result. Nevertheless, we are expecting an answer during February and I remain positive regarding the answer.

Great, thanks. And my second question is regarding the grape prices we are expecting an increase here in Chile, and if you could give us an idea of the impact in both the winery and the spirit business.

Yes, in the case of the spirit business, we have a contractor waiting for the next 10 years, where we have pre-defined price of the -- pre-defined the price of the grapes and the price of the grapes is at minimum on one hand and on the other hand, we calculate a percentage on the average price of our products. Then, if the average price of our spirits grow a lot, the percentage on these average price is going to be higher than the minimum. But, if it is the case, we will be capturing a very good price then margins are going to be okay.

Then, on the spirits side of the business, we don't have problems regarding or we don't have problems regarding the price of the grapes. In the case of the wine, the situation is a little bit more complicated than the wine because of the very strong Chilean peso. We are facing this by increasing our prices in dollar terms, in most of our markets, but of course the situation is complicated on the one hand.

On the grape side of the business, we have some grapes bought at a very good price, I would say, until -- I mean, it depends on how much we are going to sell, but considering some estimations of sales, we have grapes bought at very good price until July, August, June, September, let's say, first semester. For the second semester, we will have to buy new grapes and we expect the price of the grapes to grow a little bit. But, this is a problem for the second semester of 2008 and I expect to have enough time to increase our export prices and our domestic prices in order to cope with this situation.

Okay, thank you.

Thank you, Diego.

Thank you sir. Next question comes from the line of Jose Yordan with UBS Securities. Please go ahead.

Hi, good morning everyone. I guess my first question is just to continue on the theme of wines. In 2007, even though the financial results of San Pedro were pretty good, you lagged behind in terms of export growth pretty significantly, right? I mean, the whole industry was up in the 20% range. And I was just curious, I mean, what was the cause of this and if there is any change in strategy for basically getting more of your fair share of the growth of Chilean exports with the change in the top management there, what's going to happen going forward?

Thank you, Jose, for your question. It's true that in 2007 our export volumes grew less than the industry. But, if you go into the details, we have problems just in two countries, Denmark and UK. If you factor out Denmark and UK in our wine exports, we grew a little bit more than the industry in the rest of the countries. And what happened in these two countries, in Denmark, we have a very old relation with a supermarket chain and we have some problems with them, mainly attributable to our bad service.

We made some mistakes delivering wine to them and they decided to change being a Vina San Pedro supplier. And we are -- we have a good brand there and we are making new relations with other supermarket chains and we are going to regain the volumes we used to have very soon. But, that was the situation in Denmark.

In the case of UK, we had a distributor for many years, 16 years, and this distributor was mainly focused on low prices. And because of the low profitability of the wine business and because of the very strong Chilean pesos, we need to change this situation. And for that reason, we decided to change for a new distributor and we are paying -- or we paid in 2007 the consequences of the change. But, we expect also to improve the situation in 2008. But again, if you factor out these two markets, our volumes are very healthy and growing according to the industry.

Okay, great. And then, just to go back a little bit to the subject of the -- of beer costs, I mean, your gross margin during the fourth quarter took a bit of a tumble versus what we had been seeing so far in the year and I know that it is partly due to the increases in malt costs and all that. I was just -- I mean, two things, if there was anything else perhaps energy related that affected the fourth quarter and then more importantly, what is your outlook for malt prices and for your profitability in the core beer business for 2008?

Yes, Jose.

And if you can clarify, you said you raised prices in 2008 again, I didn't get the percentage.

Exactly. No, no, I didn't mention the percentage. You are right, Jose, we had many problems regarding margin in the last quarter. First of all, inflation rate which accelerated a lot in the last month of 2007. As I said before, when we present our financial results, we confer them on real terms. I mean, if I say that we increased prices by 1%, this is just an example, in the last quarter of 2007 compared with last quarter of 2006, this means that we increased inflation plus 1%. As the inflation was 8%, the basis of comparison are very difficult to overcome, and this is number one. Number two is the price of the malts.

Number three, the energy cost, you have to consider that in the fourth quarter of 2007, the energy costs increased by 46% while in the total 2007, they increased by 31%. And our answer is, as I said before, to increase prices but not in the [return] in order to protect this stock. I think but in one-way products and also one-way packagings and also in premium products and we increased prices in January, we are going to increase again in March, and we expect to increase again in August, which is going to be the increase, of the figure I prefer not to mention, but enough to keep our margins constant on real terms.

By margins, you mean as a percentage of sales, right?

Exactly.

Okay. Okay, thank you.

Thank you, Jose.

Thank you sir. (OPERATOR INSTRUCTIONS). At this time, there are no questions. Please go ahead.

Okay. We want to say that we are pleased with the results obtained during the quarter and optimistic regarding CCU's further development during 2008. I would like to thank all of you for attending our conference call and I hope to see you very soon.

Thank you sir. Ladies and gentlemen, this does conclude the CCU fourth quarter results conference call. You may now disconnect and thank you for using ACT teleconferencing.