Compania Cervecerias Unidas SA (CCU) 2008 Q1 法說會逐字稿

Thank you very much for standing by ladies and gentlemen, welcome to the CCU First Quarter Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for your questions. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Mr. Patricio Jottar, CEO of CCU. Please go ahead.

Good morning and thank you for attending CCU's first quarter 2008 conference call. I am here with Ricardo Reyes, CCU's Chief Financial Officer; Luis Eduardo Bravo, our IR manager; and (inaudible) Macarena Gili. You have received a copy of the company's results for the First quarter 2008. On this occasion, I would like to comment on the results of each business segment, and also trace some new developments during the quarter. After these remarks, I will gladly answer any questions you may have.

We are very pleased with the Company's results during the quarter. Consolidated volumes increased 10.7%, resulting in the expansion of 6.2% in revenue in real terms and 14.8% in nominal terms. These results are especially significant considering the usual high inflation rate in Chile [which reached] 8.1% over the last 12 months. As you know, in accordance with Chilean GAAP, comparison figures must be adjusted for inflation, nonetheless, we are able to grow in real terms operating income by 8.6%, EBITDA by 7.6% and net income by 18.8%.

We have faced considerable cost pressures during the quarter, especially in raw materials in the beer business, mainly malt and rice as well as higher energy costs with high costs [playing] more than 100 basis points of the operating margin. The Chilean beer business continued its positive trend in terms of volumes, increased by 8% in the quarter. Operating income increased by 5.4% to $63 million and EBITDA [grew to] 6.7% [reached] $76 million. The good performance of the premium segment continues growing by double-digits in spite of the price increase of 4% during the quarter.

The Argentine beer business increased volume by 13.8% which results in Chilean pesos are lower than Argentine pesos or US dollars, due to inflation and exchange rate variations during the quarter. Nevertheless US dollar terms its revenues grew by 38.9% and its operating income by 24.4%. Higher revenues are explained by the higher sales volumes previously mentioned and 24.4% higher priced in dollar terms, due to price adjustment and better mix as Heineken and Budweiser continued with a good performance seeing the brand with the highest growth in Argentina.

On April 2 we completed the purchase of the Argentine brewery, ICSA, following approval of the regulatory authorities. ICSA owns among other assets a brewery in Lujan, Buenos Aires, with a nominal production capacity of 2.7 million hectoliters per year and the Palermo, Bieckert and Imperial beer brands which together represent an estimated 5.8% of the Argentine beer market.

Our non-alcoholic product segment had a very positive performance during the quarter, increasing its operating income by 34.1%. This growth was mainly supported by higher sales volumes in all categories and lower per unit costs. Soft drink volume [produced] 16.4%, mineral water by 9.4%, and nectars by 8.3%, a 16.4% increase in soft drinks [considers the] important growth of new categories such as sport beverages and iced tea. New categories that in the future will be more important and [broken] out separately as their volumes can material.

During the quarter the wine segment was affected by two issues. One, lower export volume and two, the appreciation of the Chilean peso. Lower volume are partially due to the decrease in the sale of lower priced wine that is reflected in the average export price increase of 14.9% during the quarter, from $19.5 per case to $22.4 per case, as a consequence of the wineries' focus on more (inaudible) wine.

On the other hand, US$ decreased [CLP76.7] or 14.2% in relation to the Chilean peso during the quarter, compared with the average (inaudible) in the first quarter 2007. The consequence, revenues decreased 16.3% and operating income declined $2 million. Vina San Pedro will continue focusing on distribution, rapid (inaudible), wine making and innovation in order to cope with the challenging business environment. The [serious] business has a very positive performance during the quarter, growing its operating income by 77.8% and its EBITDA by 53.1%. These results were a consequence of Compania Pisquera de Chile's focus on premium pisco products and cost base, the operation of the new production facility in Hawaii in addition to the excellent performance of Sierra Morena rum launched in May 2007.

In our confectionery business volumes increased during the quarter by 11.9%.

Having touched on the highlights of the first quarter 2008 as well as some other recent developments, I will now be pleased to answer any questions you may have.

Alright, thank you, sir. Ladies and gentlemen, at this time we will begin our question and answer session. (OPERATOR INSTRUCTIONS). Our first question is coming from the line of Robert Ford with Merrill Lynch. Please go ahead.

Thank you, good morning everybody and congratulations on the quarter, Patricio. I had a question with respect to your expectations over the balance of the year. You had extraordinary volume performance; I know you're facing some more -- some more raw materials pressure the balance of the year. But I'm also under the impression that you have a fairly comprehensive plan to offset that with some efficiency improvements and some expense reductions. Can you elaborate over -- in terms of what you anticipate over the balance of the year please.

Thank you, Robert, for your congratulations and for your answer. It's true that we're facing strong cost pressures and that those cost pressures are going to be higher in the rest of the year than they were in the first quarter. For example, during the first quarter we experienced almost $400 per tons in the case of malt which is 20% higher than first quarter 2007. But for the rest of the year beginning in May, the average price of the malt is going to be something like $509 to $600 per ton. And this is for the rest of the year.

In the case of the energy, the cost of the energy per unit is something like 23%/25% higher than in 2007. We expect it to continue during the rest of the year. And the price, indeed, the price will rise which used to be very stable for many years is beginning to grow importantly and now we're facing probably a price of the rise in (inaudible) 100% for the rest of the year.

How to cope with these three things? Number one, by adapting the prices of the premium segments and the one way packaging. We think that the demand for these two -- for this -- for the premium products on one hand and for the one way packaging on the other is very strong and we think that's not going to be affected while we increase the price. This is number one.

Number two, we expect to continue the trend of good volumes in -- as we did during the first quarter. In fact, we have some measurements in consumers and we understand that the trend of the per capita growing is still there. In addition we expect to have a winter much warmer than the winter of 2007.

Then second, better volumes and third, we have a new strategic plan; I presented this in the last conference call one quarter ago. And one of our six priorities for the next three years is [maxeo] which means maximum operational excellence. And we have different plans in order to control our cost structure in the beer category and also in the whole company.

Of course, I would prefer not to face these cost pressures, and our 2008 year would be much more comfortable without them. But I think that with prices, with the better weather and good volume, good per capita and with all the plans we have in place in order to control the cost structure, we'll able to cope with the higher costs during the rest of 2008.

Official projections on which is going to be our final result, or how much of [this affect] are we going to offset. Of course we have our own estimations, but as you know we prefer not to make official projections.

Thank you very much and, again, congratulations.

Thank you, Robert.

Thank you. Our next question is coming from the line of Diego Celedon with Santander. Please go ahead.

Hi, good morning Patricio, hi everyone. Thank you for the call. My first question is regarding the beer business in Chile. We saw in the quarter a significant decline in the SG&A expenses over sales ratio, which was mainly explained by lower marketing expenses. While on another hand we saw a couple of days ago the announcement that SABMiller will start to be distributed in Chile and that apparently they will launch a relevant marketing campaign. So in this sense, two questions. One, do you believe that SABMiller is a relevant threat in the Chilean market?

And, on another hand, what are your expectations regarding the marketing expenses for the rest of the year, if you think you will be able to reduce them year-on-year or maintain them?

Thank you, Diego, for your questions. First of all, marketing rate. I announced two or three conference calls ago that we're expecting to decrease a little bit our marketing rate. It doesn't mean that we are decreasing our marketing efforts. Happens that we have grown our volumes in the beer business a lot and our prices also. Then a lower marketing rate means much more money in absolute terms than we used to spend in the past and we feel very comfortable with the marketing efforts we have for the rest of the year. And I think 2008 as a whole is going to be consistent on what you saw during the first quarter.

Regarding SABMiller, if a company like SABMiller decided to launch a big operation in Chile and compete face to face against CCU and against Cerveceria Chile, of course it would be a strong competitor because they are a huge company and we respect them a lot. But I think that what is going to happen in Chile is not this. I think that Miller [just import], doesn't have the ambition to compete as a big player in the Chilean market. I think that they want to position the brand as a premium brand and capture some share of the premium segment.

And this -- at the end of the day this is good for the category as a whole because if new brands are launched in Chile at the end of the day the per capita growth, as we have a very huge market share, we take a lot of advantage on this. Then I would like to say that we welcome SABMiller, in the strategy we think they're going to follow and pursue in Chile.

Thank you. Regarding ECCUSA we also saw very strong soft drink volume in the quarter. I would like if you could give us a little bit more details regarding where is this growth coming from. Is it your own labels, Pepsi? And do you expect to continue gaining market share in this category in the rest of the year?

Yes, you know, Diego, and as I have discussed many, many opportunities, we are very optimistic on the long brand on the ECCUSA operation, because we are number two before Coca Cola in the cola segment. But we beat Coca Cola in all the other categories. We beat them in the non-cola segment; we are bigger than them in the mineral water segment; we are bigger than them in the bottle nectar segment; with Gatorade we are bigger than they are in the caffeine sector.

They launch, let's see, a year and a half or two years ago and we launch Lipton two or three months ago. And according our estimations, today we have more or less the same share they have in the iced tea segment, which is a very small segment today. But all these segments are going to grow in the future. And we think that very soon we are going to have a higher share than they have in the iced tea category. In the long run, all these categories are going to grow more than soft. And then we have a winning portfolio and we think that in the whole non-alcoholic beverage segment we will gain market share [mass] in this year.

Having said that, your question has relation with the soft drink results in the first quarter of 2008. And true that we grew more in soft drinks than the rest of the categories. And the real reason behind this is that our execution at the point of sale and the relevance of our portfolio in the point of sale is being bigger and bigger, month after month because of the success we're having in the rest of the categories. And I think that as many years ago, the rest of the categories were borne thanks to our position in soft drinks. I think that today we are improving our position in the soft drinks category because of the good results we are having with the rest of the non-alcoholic portfolio.

And particularly, this is number one, and number two we are having a very good result with the Pepsi brand with many things we are doing now to transform Pepsi into a more relevant cola in the cola segment. In fact we grew by more than 20% the volumes of Pepsi in the first quarter of 2008.

Thank you very much.

Thank you, Diego.

Alright, thank you. Our next question is from the line of Jose Yordan. Please go ahead.

Good morning Patricio and everyone. My question is, they were partially answered already, but if you could give us a little more clarity on what you expect the average cost of barley to rise this year versus last year? You already talked about energy going up about 23% and remaining there, but in terms of barley, any quantification of just year-on-year increase?

And then my second question is more, when you look at the gross margin of the wine business, it didn't fall as much as one would expect, given the huge difference in FX in the Chilean peso versus the dollar and other currencies. And was there anything about the cost of wine during this quarter that made it lower, really, than even the fourth quarter of last year, which was in theory using the output from the same harvest?

Thank you, Jose, for your two questions. The price of malt, which is barley, or the cost of the barley transformed into malt in the first quarter, as I said before, was almost $400 per ton. And from May it's going to be almost $600 per ton, which is going to have a big effect in our costs. And we expect to offset in a way by volumes and by increasing prices of our premium products [and one-way targeting], as I said before. But, of course our life is less comfortable with $600 per ton malt and a $300 is the average in the last ten years but it is true for the beer industry as a whole all over the world.

Regarding the cost of wine, we -- the price of the wine we bought from third parties and the price of grapes, a lot of volatility, and in 2007 the price of wine was very, very cheap here in Chile and we got advantage to buy a lot of wine, then we expect to have cheaper wine from Chile, that depends on the volumes but until August, September, October 2008. Then we could expect to have cheap wines [second] in the third quarter.

In the last quarter and during 2009 will be experienced the cost of the current harvest and we expect it to be higher than this. Then if we have a complicated scenario in the wine business because of the exchange rate, the scenario is going to be much more complicated because of the price of the grapes in 2009. Then we need to be very smart in terms of being able to increase our prices and to improve our mix by increasing more the sale of premium products and [regular products] both in the premium markets and in the export side of the business.

Yes, I was more interested, though, in -- because both the fourth quarter and the first quarter of the year should have had that same supply of cheap wine that you were talking about from the last harvest, but there was a difference sequentially from the fourth to the first; margins were even better in the first quarter than they were in the fourth and it's not quite clear why that is.

It depends a lot on the mix, because the cost of the wine is not the same for the different categories. But in real terms we are experiencing the same costs per category of wine and the difference is related with the mix. I cannot say to you exactly, I cannot provide you, Jose, now with a [automatical] explanation how to explain the difference, but it's the same wine. Luis Eduardo wants to say something about it.

Jose, you need to take into consideration that in the first quarter of this year, we decreased [15%], our export wine that is more expensive than the domestic and we grew our domestic wine 5%, and the mix is much different and it's a cheaper wine, the one that we sell into the domestic market and the export one.

Okay.

Exactly.

And if I can follow up. You talked about an increase to $600 a ton in May. How long will that price last? Do you have a long-term contract for the rest of the year or will that last six months or, what's your -- how long are you locked into that price?

We close the price of our barley and our malt -- (inaudible) -- it has been our policy for the last many years to close the year. Then this is going to be the cost from May 2008 to April 2009. And from May 2009 we're going to have, we need to wait for market conditions.

Sure. And so we can expect a price increase of some magnitude in some time in the May timeframe?

We want -- our idea is to keep our margins (inaudible), as I said in my last conference call, and we could keep (inaudible) the scenario where the price of malt is increasing, you could keep margins by increasing the price of all the beers, or by increasing the volumes, or by increasing some categories, or by increasing some sales targeting, or by decreasing costs. With a combination of all these elements or dimensions our idea is to keep margins. Our purpose, of course, I don't know if we are going to be able to do this, but this is our purpose. And I prefer not to say exactly which is going to be our combination but ideally would like to focus on controlling costs and increasing premium and one way. Instead of increasing the prices of all the beer.

Well, presumably the exchange rate where it is now will help you quite a bit and be able to pay 50% more in dollars per ton.

(Inaudible) definitely. It helped a lot during the first quarter and I expect this to help the rest of the year definitely, Jose.

Okay, great, thanks.

Right, thank you. Our next question is from the line of Jorge Opaso with Larrain Vial. Please go ahead.

Hello, good morning. Congratulations to all of you for the excellent results. Well my question is regarding ECCUSA, considering that ECCUSA will possibly be the main driver for good results this year, what are the main factors that you expect for this year in order to keep the excellent margin (inaudible) this division.

Thank you Jorge. How -- for your congratulations and for your question. As I said before, we are growing and we expect to grow in the future a lot all these new categories I mentioned before (inaudible) Gatorade, energetic product, mineral water with flavor, nectars, juices etc., etc, (inaudible) based products in the future, probably not in 2008. And all these new categories have a much higher margin than the regular soft drink on one hand. And on the other hand, in all these new categories we're promoting a lot the individual packaging and the individual packaging has much higher margins than familiar packaging. So when you sell a 3 liter plastic bottle one way of PepsiCo or Pepsi for example, you're making a third or 40% of the margin than when you sell -- when you say, a small packaging of nectars, for example. And we're growing at a much faster speed in these new categories and individual packaging. This is going to be the main source of margin in the future. And additionally most -- and the main raw materials in the case of -- in the case of our soft drink division or ECCUSA, non-alcoholic division, are sugar and pith. And fortunately pith prices and sugar prices have not increased. In the case of sugar, it has decreased by 13% during this quarter.

Okay. Thank you.

Thank you.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS). The next question is from the line of Sean Glickenhaus with Citi, please go ahead.

Hi, how are you. We actually touched base on the first question on soft drinks. So switching over to wine; the export volumes we talked over the last couple of quarters; there were some negative impacts from, I think, mostly from Europe. When can we start seeing a return of those volumes, I think there was some issue with the soup market in distribution, so shall we start seeing growth in that segment in the second quarter or a little later than that? Thanks.

Thank you [Chuck] for your question. In fact our purpose and our budgets for these years to grow -- is to grow in the export side of the business and for us not good news to decrease volume. [Two], that the decrease was concentrated on the cheaper priced wine, less than $20 per case. I know categories of $20 or more per case we view importantly. We expect to resume or grow in the second quarter and to continue growing in the rest of the year in the wine export sector.

Okay, thank you. Just a quick follow-up on that is -- so you're expecting growth but should we actually get a rebound -- if I'm looking at the latter part of this year, beginning of the next year, we actually should get a rebound, like all those volumes that we lost on the export side should come back and then grow from there, right?

Yes.

Okay, fantastic. Thank you so much.

Thank you Mr. Jottar, there are no further questions at this time. Please continue with any closing comments.

Okay, I would like to say again that we are pleased with the results obtained during the quarter. In spite of this more complicated scenario, particularly regarding cost pressures we remain optimistic regarding this year's further development -- development during 2008. I would like to thank you -- all of you for attending our conference call and I hope to see you soon. Good afternoon.

Thank you. Ladies and gentlemen, this does conclude the CCU first quarter results conference call. At this time you may disconnect. Have a very pleasant rest of your day.