Compania Cervecerias Unidas SA (CCU) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CCU third quarter 2008 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) This conference is being recorded today, Thursday, October, 30, 2008. I would now like to turn the conference over to Patricio Jottar. Please go ahead.

Good afternoon and thank you for attending CCU's third quarter 2008 conference call. I'm here with Ricardo Reyes, CCU's Chief Financial Officer; Rosita Covarrubias, our recently appointed IR Manager, and analyst [Carolina Bulvar].

You have received a copy of the Company's results for the third quarter 2008. 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 satisfied with the Company's results during the quarter considering the impact of an unexpectedly high inflation for the period. Consolidated volumes increased 11.4%, resulting in an expansion of 12.6% in revenues in real terms, and 23% in nominal terms. These results are especially significant considering the unusual high inflation rate in Chile, which reached 9.2% over the last 12 months.

As you know, in accordance with Chilean GAAP, comparative figures must be adjusted for inflation. Nonetheless, we were able to grow in real terms operating income by 7.4% and EBITDA by 7.8%.

The Chilean beer business continued its positive trend in terms of volumes, growing by 6.6%, and revenues by 6.1% in the quarter. The premium segment's sales volume grew vigorously by two-digit percent versus the mainstream volume with a single-digit percentage growth.

Cost pressures impacted this segment in particular because not only the malt price is approximately 50% higher in real terms, but also the cost of energy increased nearly 24%. In addition, (inaudible) which explains the high cost of goods sold as a percentage of revenues come from a Chilean market practice in the handling of returnable bottles. Factoring out this effect the drop in the EBITDA margin would have been 1.2 points instead of the reported 3.6 points.

Due to the high inflation, the price increases percentages adopted throughout the year were not enough, and as a consequence the average selling price, 0.6% lower than 2007 in real terms. In this regard we took two actions whose effects are not fully represented in the P&L yet. In August price were adjusted in 9.3% for premium brands and non-returnable packaging. Whereas, returnable packaging price were increased by around 6% with an exception in October 2008. The two combined actions represent a total average rise of 7.7%, and we'll see the complete text in the next quarter's revenue.

The Argentine beer business had a good performance in the quarter, having increased revenues by 110.2%, mainly due to a 45.9% growth in volumes, and 44.5% higher prices in Chilean pesos. Operating profit varied from negative to positive CLP1,000 million. The result, Chilean pesos are distorted due to the variation of the exchange rate versus inflation during the quarter.

In dollar terms revenues grew 84.2%, prices increased 27.1% due to structural changes and a higher premium mix, and operating income improved $1.8 million. Higher volumes and revenues are partially explained by the ICSA brand's Palermo, Bieckert, and Imperial, without considering ICSA volumes increased 16.5% in Argentina during the quarter.

Our non-alcoholic beverage segment had a positive performance during the quarter, increasing export revenues by 5.1%. This growth was mainly supported by higher sales volumes in all categories and a higher average price. Soft drink volumes grew 3.5%, mineral water by 4.8%, and nectars by 6.3% for a total 4.1% increase in this segment.

The operation profit in this segment remained practically flat because of a lower inventory spread adjustment and the rise of the cost in energy, partially compensated with lower raw material cost. In this segment without the spec of the bottles' warranties adjustments, EBITDA margins would have been decreased by 0.9 points instead of a drop of 0.4 points.

Additionally, during the quarter we entered into the soy-based category, as we launched Watt's Soya. The one segment increased the quarter's operating profit by 26.5% as a result of lower volumes but with greater margins. Domestic prices are up by 8.2% and export prices in dollar terms by 7.4%. In Chilean pesos the export prices are almost flat and this is explained by the appreciation of the Chilean peso.

Yesterday, October 29th, the Board of CCU became acquainted with the due diligence reports on the Vina [Tarapaca] affiliate and Vina San Pedro affiliate. The Board acknowledged that there were no findings that could hold up the merge of the two companies and the foreign transaction process will continue in the same economic terms informed to the market on July 15 and July 21, 2008. In the next few days the parties will agree to the final terms of the required contracts to execute the transaction and will decide them accordingly. At the same time they will agree on the day they will summon the respective extraordinary shareholders' meetings to get acquainted and to approve the merge. We'll keep the market posted on these events.

Finally, the spirits business operating income grew by 46% and EBITDA by 40.7% in the quarter. These results were mostly thanks to placed focus on premium products and cocktails. Lower costs of pisco alcohol and marketing expenses in line with our long-term rate led to reductions in cost and expense beyond the reduction in revenues. In the quarter we launched a high-margin new cocktail, Chirimoya Colada, a mix of pisco and custard apple.

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

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from line of Robert Ford, please go ahead, sir.

Hey, good day everybody. Congratulations on the quarter, Patricio. I had a question with respect to -- well, I actually had three questions if I could. The first was with respect to the price increases. As you cycle into the December quarter and as you look at the initial impact of the price increases, first of all, is there any immediate indication as to how the market is responding to price increases? I know you had the premium and non-returnable packaging in there first, but I'm curious as to if there is any response as well on the more recent price increases in returnables.

I'm also curious as to what kind of a margin benefit you anticipate going into the fourth quarter. Can you maintain your margins in beer with these price increases, or actually improve them year-on-year as you go into the December quarter? And then I was curious if you could just review your existing hedges both in FX as well as commodities, and then lastly if you could comment on the spirits volumes.

I know you're selling at better prices, you're selling higher margin product in Sierra Morena, but I'm curious as to whether -- how the brand health indicators look like, and are you happy with the volume trends in spirits.

Thank you, Robert, for your questions. Let's go first of all to market reaction regarding August price increases in one way and premiums. I would say that market reacted well, and we have not been -- no target defect in volume trends regarding one way in premium products and (inaudible).

In the case of returnable packaging, we just made increase. In fact, we announced it at the beginning of October, and we began to increase prices in the second half of October. Then -- we don't have enough days to observe the effects in order to answer your question. But I would say -- but I'm going to answer it considering our experience. Usually we have been increasing prices following inflation, and we have had no effects in the past, then we expect not to have important effects now. This is number one.

We have to consider because of the recession, we are beginning to leave -- in the world of costs, we are going to start with some (inaudible) in the next month, and particularly in 2009. Probably unemployment rate is going to grow a little bit, and if it is the scenario it's much harder to sell with higher prices than with lower prices.

In any case even in the scenario of high unemployment rate our strategy is going to be keeping margins, and I prefer not to grow in volumes, but to keep the margin, because when the economy resume growth it's much easier to grow in volumes again than to recuperate -- [deteriorate] the margin. This is number one.

Then you asked me about margins in the last quarter of 2008. As always we prefer not to make quantitative projections, but obviously with the important increase we have just made our margins are going to be good. Regarding hedges we will -- the main raw material we have in beer -- in the beer segment is the malt. As we have mentioned in other conference calls we buy malt for a year, beginning in May and in April of the following year.

Then we have a fixed price now for the malt, which is around $600 per ton, to April 2009. And in May 2009 we will face a new price, and apparently it's going to be lower than it is today.

And finally, regarding rum and pisco I think the devaluation of the Chilean peso is good news for the pisco because the rum is 100% imported. And the problem -- and one of the problems we -- pisco was facing in the last month was the fact of competing against a very cheap [imported] rum, because of the devaluation of the Chilean peso rum is going to be much more expensive and will be able on one hand to increase probably prices of pisco, and on the other hand to improve the trend of volumes experienced in the last two years. Then I am optimistic about the evolution of the pisco business in the next 12 months.

So Patricio, you're attributing all the decline or the lion's share of this 21% spirits volume decline to the relative price gap, rum versus pisco and --?

Important effect, but there is also cultural effects. Most of the (inaudible) consumers of pisco and rum have travel to the Caribbean every summer and they drink rum there and they come to Chile and they want to drink rum again, or to feel as if they were in the Caribbean beaches. There is also again a cultural effect, but of course the price effect is important.

We have some estimation to [determine] how important one effect and the other, but I prefer not to discuss on this details. But again the devaluation, and the fact that rum is going to be much more expensive is going to be an important effect.

Okay. And then with respect to your malt exposure, you mentioned that you're locked in at $600 a ton. Did you already have physical full-year inventories, or are you exposed to the weakness of the peso versus the dollar over the course of the balance of your contract?

No. We are always exposed to the dollar. When the Chilean peso appreciates a lot against the dollar we benefit from the fact of buying dollars at cheaper price. When the Chilean peso devaluated we are exposed to the fact of buying dollars at a higher price.

As a policy we never buy hedges in dollars for raw materials. The only kind of hedges we take are related with our financial debt because our policy is to have a financial debt in US, which are Chilean pesos adjusted by inflation. And when we take credit from an international bank in dollars, we change it with a cross-currency swap from dollars to US as a policy. And this is what we have [made] for many years. But in the case of raw material, we never take currency hedges.

Great, thank you very much.

Thank you.

Thank you. Our next question comes from the line of Sohel Amir. Please go ahead.

Good morning. My question was more with regards to demand, how you see going into 2009. Now -- it's fairly clear that you are able to pass on price increments, at least prevalent to inflation. But with the expectation that 2009 economically is going to be a weaker year in general, how do you see that impacting volume numbers and what, if any, action is being taken on your part to mitigate some of the slowdown that you may experience?

Thank you for your question. (Technical difficulty) As you know -- as you mentioned, we are facing a big crisis, and we don't know exactly which are going to be the effect -- probably we're going to do our part in what is happening now with the Asian crisis 10 years ago; as you'll remember the Asian crisis began at the end of 2007, and -- really 1997 and then 1998.

And these effects in Chile came with some months later. And we experienced unemployment and a recession in 1999, one year later, which is the same case which is going to happen in 2009 after the Wall Street crisis, or the subprime crisis or whatever you wanted to name it.

And in the case of 1999, in Chile, GDP decreased by 0.8%. We are not expecting GDP to decrease by 0.8% in 2009, because the Chilean economy is much stronger today than it was 10 years ago. But this was what happened there. And our consolidated volumes, Chile and Argentina altogether decreased by 1.3%. We -- again, that was 10 years ago, the Asian crisis. Until now, all the information we have regarding the Chilean economy and the figures we are going to face in 2009 are better than what happened in 1999. The GDP is going to grow, pessimistic view is 1%, optimistic view is 3.5%, average 2 points -- 2.3%.

If it is the case, both our volumes are going to suffer a little bit. It will not keep the same trend that we have had in the last six or seven years where the GDP have been growing at a much bigger rate. This is what we expect today, then probably volume growing not too much. In order to face these we have many actions and of course we have been changing all our [prices] and many things for 2009.

Number one, we are going to make our best effort in order to keep, or to increase our margin. Because again, if you deteriorate your margin, it's difficult to increase them in the future, but if you lose volumes, then it's much easier to recuperate them in the future. This is number one.

And number two, we are going to diminish -- or we are going to -- our CapEx significantly. Our initial prediction -- or our initial estimations for budget for 2009 were around 140% of depreciation. Today we are thinking in 0.5, 0.6 or 6 -- [50% or 60%] of the depreciation, because we want to protect our [ties]. This is number two.

Number three, in terms of employees or FTEs, fulltime employees we are going to raise the total number of employees. We expect not to reduce employees because today we have an efficient operation regarding this. Again a parallel between now and the Asian crisis, in the Asian crisis our consolidated volumes were 9 million hectoliters, and our fulltime employees were almost 5,000.

Today we have the same 5,000 full-time employees, the same that we had 10 years ago, but our consolidated volumes are 60 million hectoliters instead of 9 million hectoliters. Then we expect not to reduce the FTEs.

And finally, we are putting much more emphasis on all our [Maxeo] plans. As I mentioned before we have a plan to make much more efficient our operations (inaudible) under the name of Maxeo, which means maxima excelencia operacional, or maximum operational excellence, and of course we're going to put much more focus on this.

And finally, as you know, our balance sheet is very strong. Our consolidated debt, short-term and longer-term debt is something like 1 or 1.1 times EBITDA and we feel very comfortable in this regard.

All right. Just trying to drill in a little bit more into what you just said, are there certain categories that you think are going to get more affected or have gotten more affected in the past as a result of slowdown?

And also with regards to your marketing and selling expenses, do you expect them to remain the same as a percentage of your sales or do you think you would like to put more emphasis on marketing in a period of weakness?

Well, probably we are going to keep our marketing rates or -- probably we are going to keep our marketing rates or reduce them slightly. Not a good idea to reduce marketing expenses dramatically because you'll deteriorate the brand equity of your brands on one hand and on the other hand in periods where the economy is not growing a lot where we are facing recession, it's -- the marketing expenses would be much more efficient because it's possible to buy the same minutes or the same seconds in TV channels, in radios (inaudible) by a much cheaper price.

Then probably we're going to save a little bit in terms of total -- the amount of money we're going to spend. But the power of our marketing campaigns, and our marketing campaigns and our exports is not going to be reduced.

Regarding categories, yes, it's true, some categories would suffer little bit more than others. But we -- but our purpose is -- will prevent ideally -- what we'd like is not to reduce volumes in any category. This is our goal.

And in some categories we are going to keep volumes, and in others we are going to increase volumes in a small percent which of course as I said before, and altogether, we expect to increase volumes a little bit. But again, our purpose is to protect our categories in a tough year as 2009 is going to be.

That was very helpful. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Alex Roberts, please go ahead sir.

Hi everybody, thanks. I guess I was interested in just going back to Chile and the cost of sales. Thanks for the clarification and views on the malt price. I'm wondering if we could get a better feeling on the energy piece. I guess 24% is what you were saying is the year-on-year increase. Can you give us a sense of how you're looking at that input, kind of into the fourth quarter and next year, the frequency of buying the energy, or what the price trends are?

And perhaps if you could remind us of how much roughly is energy of the Chilean beer COGS. So that would be the first question. And I guess secondly, it's about Argentina. This is the interesting new element in your business. And I guess for Argentina there are a couple of things. The 16.6% organic -- or volume growth, this is quite robust, and wondering how much of this was explained by the premium segment.

And maybe some color you could give us on this growth rate looking forward into the next couple of quarters too. You're taking these brands also -- the second question on this is, as you move out your distribution to the Greater Buenos Aires area, and you build out for the brands of ICSA, how is this process going? Are you finding some opportunities? And how are you thinking about Schneider and Heineken in this new area that it seems to me is the incremental piece that ICSA gives you. So that's really what I'm interested in knowing about.

Okay. Thank you, Alex, for your question. Let's begin with Argentina, and then let's move to energy. In the case of Argentina, it's true, 16% it's a very robust rate. And the most important growth have -- came from the premium segment. That -- I prefer not to open the -- or not to give the breakdown between premium and the mainstream because this is competitive information. And we're competing in the marketplace, and we try -- and we keep this information for us, but of course premium segment is growing a lot.

The outlook for the next quarter in 2009 is not necessarily as positive. In Argentina it was -- the last 12 months, or the last five years in Argentina were exuberant. And people were spending a lot of money. But now it seems that -- going to pay the consequences of these. And there is a lot of vulnerability -- vulnerabilities in the Argentine economy.

Then I prefer not be very optimistic regarding Argentina. Then if I -- what I mentioned before making the comparison with the Asian crisis in 1999, it's true for Argentina -- but -- it's true also for Argentina. But in the case of Argentina, vulnerabilities are higher than in Chile.

Then I prefer to be very careful in the case of Argentina. Of course because of the acquisition of the ICSA brand we improved our operation, or we increased the size of our operation in Buenos Aires.

In fact, 70% of the volumes of the ICSA brands are concentrated in Buenos Aires. And because of that now, we have a bigger, critical mass in Buenos Aires, and of course we could leverage on this to sell more Heineken and more Schneider, and we're going to do this. But every step we're going to take in Buenos Aires is going to be a very -- I think Argentina is going to be a very conservative step in terms of marketing efforts, in terms of FTEs, in terms of investments, because we're concerned about the future of the Argentine economy.

Regarding energy, it's very difficult to project this. In fact we are making again all the figures for 2009, and making the budgets and precisely where we have more problems on how to budget is regarding energy. Because there are stabilization funds here in Chile, taxes issues, there are exchange rate issues, et cetera, et cetera. Then really, I wouldn't feel comfortable doing a projection of what is going to happen with energy.

I don't know if Ricardo, Rosita if you want to comment something regarding this.

Okay. Hi, Robert. Regarding your question on how much important is energy in our total cost, I could mention that in last year energy represented 2.3% of our revenue in the third quarter. And this quarter grew to 2.8% of our revenue, because of the significant growth in energy. But the production is not as much as [people] have mentioned. On the other hand, is the impact on distribution, that also increased because distribution cost is linked to the cost of oil, and of course (technical difficulty).

Good, thank you very much.

Thank you Alex.

Thank you. Our next question comes from the line of Jose Yordan. Please go ahead.

Good morning everyone. I had a couple of questions, one on -- just in general, Patricio, just be -- interested in your outlook, what's your outlook for Chilean wine exports in the context of a global recession, especially in the places where Chilean wine is strong, such as Northern Europe, UK, et cetera, just your outlook of what's going to happen there for premium wine exports over the next couple of years.

And then just -- if Ricardo, if you can just clarify what the impact of this adjustment on the returnable bottles, what that meant on the EBITDA margin of the beer business, and whether you want to do it now or offline, I'd just like to understand what that was about, especially whether it's a one-time adjustment or not.

Okay. Thank you, Jose, for your question. Regarding wine exports, probably the world's demand is likely to slow down, even for wine, pushing probably prices and volumes down, or at least being difficult to grow.

But the question here is if the consumers are going to look for good quality -- for good price-to-quality ratios, and if it is the case, the wine industry, the wine export industry is going to benefit. And now this is what we think -- with this, what we think is going to happen. We think that probably the very -- and the top premium wines, very expensive are going to suffer a little bit.

But we think it's difficult for the cheap wines, good quality, which is most of the exports of Chile, and almost 100% of the exports of Vina San Pedro. I think that we are not going [backwards]. And not only this, probably we could benefit a little bit because of the paydown of some consumers from Australian, New Zealand, French, Italian wines from Chilean wines. Then, I'm not particularly concerned regarding this point on one hand. And on the other hand, the exchange rate, of course, is going to benefit us.

Regarding the second, returnable bottles, as I explained this before, without this effect, EBITDA margin in Chile would have decreased by 1.2% instead of 3.6%, and the effect of this was 2.4 points in the case of the beer business. And in the case of the soft drinks, instead of decreasing 0.4 would have increased by 0.9, then it was 1.3% the effect in the case of the soft drink business, which is a lot.

And I would like, probably Ricardo, you to explain exactly how it works to Jose, and all the people participating in the conference.

Yes. Okay. Jose, every year, you know of us, we take a pool of the bottles that are in the market. And we know exactly the bottles that are in our yards, and factories. So we adjust the liability in the case our customer return the bottle. And we started with this policy about 6 or -- 2002, so six years ago.

And in 2007, the adjustment in the case of -- the credit adjustment in the case of the liabilities was in the range of CLP1.3 million, and this year the adjustment was almost zero, the credit adjustment. Now, this is the effect -- that is an accounting effect that affects positively 2007, and did not produce any effect 2008.

Okay, great. Thanks a lot.

Thank you. (Operator instructions) And Mr. Jottar, I show no further questions at this time.

Okay. Thank you. I would like to say that the good results obtained during the quarter, and overall increase in revenues, maintaining expense and cost percent is under control, growth of operational results and EBITDA in real terms leave a nice feeling, and cautious optimism regarding CCU's further development during 2008. And regarding 2009, we need to see what is going to happen.

But again, we think that we are taking measures which should be (technical difficulty). That's it. Thank you all of you for attending our conference call. And I hope to see you soon.

Ladies and gentlemen, this concludes the CCU third quarter 2008 conference call. You may now disconnect. Thank you for using ACT conferencing.