Compania Cervecerias Unidas SA (CCU) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CCU Fourth Quarter and Full Year Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded today, Friday, January 30, 2009. I would now like to turn the conference over to our host, Mr. Patricio Jottar, CEO of CCU. Please go ahead, sir.

Thank you. Good afternoon and thank you for attending CCU's Fourth Quarter 2008 Conference Call. I'm here with Ricardo Reyes, CCU's Chief Financial Officer; Rosita Cavarrubias, IR Manager; and Analyst Macarena Gili.

You have received a copy of the Company's results for the fourth 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 2008 fourth quarter results. Consolidated volumes increased by 8.4%, breaking down as follows -- 2.1 points represent the organic growth; 5.4 points the acquisition of ICSA in Argentina; and 0.9 points the consolidation of Vina Tarapaca's volumes, recently merged with Vina San Pedro.

The quarter's growth in volumes, in addition to higher average prices, especially in the beer, Argentina and wine segments, resulted in a 23.5% increase in revenues. In addition, CCU presented an expansion of 4.5% and 9.7% in operating income and EBITDA, respectively; 3.1% and 7.2%, respectively, before consolidating Vina Tarapaca.

The Company's bottom line showed a 38.3% decrease during the quarter, mainly due to the absence this year of a non-recurring gain obtained in 2007, related to the association with Nestle in the water business.

In the Chilean beer business, operating income and EBITDA decreased by 8.6% and 5.3%, respectively, mainly due to higher raw materials cost in US dollars and the effect of the Chilean peso devaluation against the US dollar of 27.1%. Chilean beer business revenues grew by 3.1% during the quarter, mostly explained by 2.7% higher sales volumes and 0.1% higher real average prices.

Sales had a good performance after the 6% price increase implemented last October for the mainstream products. The premium brands stood out during the quarter, increasing its volumes double digits in spite of a 9.3% price increase last August.

In December, we introduced a new non-alcoholic beer in the market; it is called CERO.0, which maintains the beer flavor and properties, but contains no alcohol. Non-alcoholic beer development responds to new consumers' needs.

The Argentine beer business operating results and EBITDA in Chilean pesos expanded by 116% and 121%, respectively. They are distorted due to inflation and exchange rate variations during the quarter. In US dollar terms, operating income and EBITDA increased by 56.8% and 44.3%, respectively, due to higher revenues of 57.5%, partially offset by higher costs and expenses.

Higher revenues are explained by 36.6% higher sales volumes, due to a warmer season and the acquisition of ICSA brands, as well as 12.3% higher prices in dollar terms. Higher prices result from a higher share of premium products as well as one-way packaging in our mix, and from a nominal price increase to partially offset the rising cost environment. The new brands explained 26.2% of the growth in volumes. Organic growth in the quarter was 10.4% year on year, without considering those brands.

In the non-alcoholic beverage segment, operating income and EBITDA decreased 16.5% and 12.4%, respectively, mainly due to lower volumes of 1.6% with a higher averages price of 0.1% in real terms, higher packaging material costs in US dollar, lowered expenses and the devaluation of the Chilean peso. In November we increased nominal prices on average by 3.6%.

In the wine business, the merge between Vina San Pedro and Vina Tarapaca was fully accomplished on December 9th in the terms and conditions announced in our communique dated November 13th. In summary, Vina San Pedro absorbed Vina Tarapaca in a new company named Vina San Pedro Tarapaca. Vina San Pedro Tarapaca will benefit from a broader brand array, becoming the third-largest player in the domestic market, leading the fine wine category in Chile and is second in the export market.

The volume will also bring synergies in the operation of the industrial processes, optimization of supply chain, and sales and back-office functions.

As per the Chilean ruling, for reporting purposes, we are consolidating the fourth quarter operation of Vina Tarapaca in volumes as well as for the financial statements. The wine business, before and after consolidating with Vina Tarapaca, showed a good performance. Vina San Pedro Tarapaca's operating results reached 111% as compared to the fourth quarter of 2007 or a 62.1% increase before Vina Tarapaca, and EBITDA is 73.2% higher, or 23.7% before Vina Tarapaca.

The average real price in Chilean pesos was 37.3% higher in the quarter or 23.7% before Vina Tarapaca; positively affected by a depreciation of the Chilean peso, resulting in an increase of revenues of 50.6% or 13.6% before Vina Tarapaca.

The spirits operating income grew by 44% and EBITDA by 43.1% in the quarter, as a consequence of lower real costs per hectoliter and marketing expenses in line with the long-term marketing rate. Compania Pisquera de Chile continued placing focus on the premium pisco segment and our cream-based cocktails.

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

(Operator Instructions). Our first question comes from the line of Alex Roberts. Please go ahead.

Hi, everybody. Thanks. Two questions; I guess first of all really, on Argentina this a business that-- the beer business has become the second-most important segment here for CCU. And I was interested to see the organic growth rate maintain its double digit rate-- I mean to 10.4%. And I'm wondering if you could talk a little bit about how you see the organic growth rate for CCU in the beer business into the first half of '09. And I guess kind of where I'm trying to get a sense of is, do you see a soft landing, do you see ongoing growth rates at these levels? And how do you think-- I would imagine that the premium segment probably slows coming into this year, and if you could perhaps give us some color as to how you see that segment of premiums developing in the first half of the year?

The second question just relates to your view on just input costs, primarily if you look at your-- in terms of Chile beer. We were interested in getting a sense of how do you see the grain and packaging cost pressures evolving in 2009. My sense is that by 2Q you start to get some year-on-year relief. And if you could, help us understand that. Thank you very much.

Thank you, Alex, for your questions. First of all, regarding Argentina, I agree with you that the 10.4% of organic growth is very good growth. It's difficult to-- I mean to imagine that we will be able to keep this kind of growth in the future. I mean as you know, 2009 is going to be a very tough year all over the world, but more than that I would dare to say that 2009 is going to be a year full of uncertainties.

What-- I mean what we really could say regarding 2009 is we that we don't know exactly what's going to happen with volume. Then to keep flexible in order to adapt our organization, our marketing efforts, our sales efforts, our cost structure and our strategy as a whole is going to be the key element in order to have a good result in 2009. Regarding this, I could say that we are prepared for very different scenarios in 2009.

If we are going to grow, we are prepared to grow. If we're not going to grow, we are prepared to keep the flat volumes. If our volumes are going to decrease, we are prepared to cut costs and to-- I mean we have a contingency plan for this case and we are prepared for any single case.

I would like to say that we have never worked as hard as we have worked in the last three to four months preparing our Company for 2009. Because again, we are not prepared for one scenario or for two; we are prepared for many different scenarios.

Having said that, I think that today, we benefit from our very strong and good portfolio. After the acquisition of ICSA, we improved the critical mass of our operation in Argentina in many different regions. As you know, Argentina-- I mean it's not a single country, but Argentina is many different countries regarding the beer business and we have some areas where our market share is 60% and in other areas our market share is 3%; altogether we have 20% to 21% market share. But we have very different positions in very different areas.

After the acquisition of ICSA, we improved our position in many areas where our market share was very low and where we didn't have enough critical mass to push the brands of our portfolio. Then we are evaluating and looking for and benefiting from many opportunities in many different regions of Argentina; then I would like to say that I feel a little bit positive regarding this.

In particular, regarding the premium segment, we have been growing a lot, improving our margin importantly because we have a very good and strong position in the premium segment and we think that this trend is not going to change.

Regarding Chile, I agree on what you are saying. In the second quarter-- I'm sorry-- particularly in the second semester, we'll have some relief in the cost of raw material, comparing 2009 with 2008. The first quarter of 2009 is going to be very tough regarding this because if you remember, in the first quarter of 2008 we were experiencing a $308 per ton of malt. In the first half of 2009, we will have $600 per ton.

But in the second quarter of 2009, we'll begin to benefit of the lower cost of the malt and we'll be comparing the second quarter of 2008 with a $600 per ton cost of the malt.

In general terms, what's true for the beer business and the malt is true for all the businesses and the raw materials. We are experiencing a decrease in the cost of most of the raw materials in the different businesses. And this point, in addition to the fact that probably inflation is going to be much lower in 2009, allows us to think that we'll have less cost pressures and cost relief in the second part of the year. We're optimistic regarding at least this part of the case.

Regarding volume again, as I said before, there are a lot of concerns but regarding cost of raw materials, we'll have very good news beginning the second quarter in Chile and in the rest of the business.

Okay. Thank you.

Thank you. Our next question comes from the line of Robert Ford. Please go ahead.

Hey, good morning everybody, and thank you, Patricio. I just wanted to pin you down a little bit, if I could, on malts. You mentioned that you're comparing against a $308 malt price last year in this first quarter and you're carrying malt at $600 a ton. Have you locked up malt yet for the second half?

And then you mentioned the second half specifically and you suggested that the first half you'll continue to have the $600 malt price. But my understanding was that you start to cycle into lower-cost malt as early as May. So I just wanted to make sure I understood that correctly.

Thank you, Robert, for your question. Usually we have stock for the next three to four months. Then we will experience a relief in cost whenever it happens, if it happens, four months after it happens in the market; this is what I could answer regarding this point. Then if you have a decrease of 10% in May, we'll experience-- in the market price, we'll experience it three or four months after this.

And why we have three months of stock, because, I mean, Chile is a very isolated country, in many senses. It's too risky not to have enough raw materials for our production. But I don't know if you remember six months ago or seven months ago, we were importing raw materials-- the malt from Argentina. The frontier between Chile and Argentina was closed for some weeks because transportation in Argentina decided to take control of the highways because of some complaint they had with the authorities; then it's risky for us not to have an important stock.

Okay, so then I would take that to mean that you may not cycle into the lower cost malt until August. Is that correct?

Robert, we are beginning to buy now malt and we are beginning buy now barley at a lower price than we used to buy four months ago; I mean now-- two weeks ago, one week ago today. And we benefit from this in four more months. Then in May we'll be benefiting a little bit. What I'm saying is that we will take advantage of any decreases in the market, three to four months after it happens.

Today, we are buying malt at a lower price than we were buying four months ago. Then, we'll have some effects beginning in April and May. But if the price continues going down, we will have a five-month period gap to take advantage of this.

Okay, that's much better. Now I understand. And then if I look at the spot numbers right now, Patricio, my best read is that at one point in time you probably saw that $300 a ton price again in the last few weeks. And right now we're probably around $360. Am I in the ballpark in terms of where you're buying malt these days?

To be absolutely honest, Robert, I can't-- I'm not prepared to answer this question because I know that we have been buying at a much lower price, but I don't have in mind the right figure.

And then with respect to soft drinks, particularly in Chile, I mean you did the price increase, you have great volumes; I know the weather was warmer in the fourth quarter. Can you talk a little bit about how the soft drink business fared in the fourth quarter? Volumes there were a little bit weaker. I know a lot of people are concerned with respect to down-trading and B brands and I was curious as to whether or not you're seeing any of that at this point in time.

You know what happens, Robert. If you look at the last press release we made in the last quarter of 2007; you will see that we grew our soft drink volumes importantly. But for many reasons we gained a lot of market share in the south of Chile and we recuperated market share in other regions. Now we are losing a little bit of the market share we gained one year ago, but keeping the same market share we have had in the soft drink business in the last five years.

I mean there is not something structural regarding the decrease we had in the soft drink volume in the last quarter of 2008. In fact, the brand equity indicators of our soft drink portfolio, are very good and very healthy and we expect no surprises regarding this-- regarding market share.

What is going to happen with the industry as a whole? I mean it depends on what happens with the economy in 2009 and of course we have uncertainty regarding this, as I said before. But we are not afraid of losing market share regarding the Coca-Cola system and we are not afraid to lose market share regarding the brands because we have a good portfolio with different prices, with different packaging and we are prepared to receive a trade in that. We see the consumers which are trading down with different packaging and different price strategies all around Chile.

And again, we are not too concerned-- it's not a concern for us, what happened regarding the soft drink volumes business in Q4 2008.

So then if I look at last year in the fourth quarter, some of that is more attributable to perhaps innovation and the rollout of Punto Maximo and now we're just cycling up against those introductions, those perhaps step-ups in specific geographic regions, right?

Exactly.

Okay. Thank you very much.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Jorge Opaso. Please go ahead.

Hello, everyone. My first question is about the price increases in the beer division in the third quarter and the fourth quarter of last year; about the implications in margins that we may see, I don't know, in this quarter or the second quarter of this year, partially offsetting the raw material increases because of malt. That's my first question.

And the second question is about Argentina. What is your view there in the consumption of CICSA? Okay, we saw last year very good volumes of CICSA without considering the acquisition of ICSA-- sorry of Inversora Cervecera.

And the third question is about margins in CCUA about the decrease of this quarter. I know that you had some Argentine increases because of the exchange rate and what can we see in that division in terms of margins this year? Thank you.

Thank you, Jorge, for your questions. Probably one more thing regarding the question made by Robert a second ago; here I have the press release with the volumes of soft drink in Q4 2007. And we increased our volumes by 9.8%, which is definitely a much higher volume than the industry in that quarter. This is the reason why we lost a little bit of volume in Q4 2008.

Okay, now I'll go to your questions, Jorge. We increased prices in the beer division in Chile in August and September in 2008, in the premium segment and in October, the mainstream segment in a very important way. And why we did that?

Number one, because most of our costs are indexed by inflation and inflation rates were very high in 2008, as you know in Chile. And secondly, because the cost of raw material was very high, on the one hand, and the exchange rate also was very high. Then we were obliged to increase prices.

We expect that this price increase plus, probably, an additional one during 2008, will be able to have healthy margins in 2009. That is what we have in our budget and we're working regarding this point. The negative inflation we had in December and expected negative inflation we'll have in January we'll help a lot because as you know, our -- hello?

Yes?

Excuse me. Because as you know, we try to grow our results in real terms and with negative inflation in two years, our real prices increase importantly and this is the situation regarding prices in Chile.

Regarding volumes in Argentina, as I said before, the organic growth of Argentina, prior to the acquisition of ICSA was very good in 2008. And I am positive regarding 2009 because of the strength of our portfolio and because of the critical mass we gained with the acquisition of ICSA which is good regarding ICSA volumes, but also good for CISCA volumes because the higher critical mass allows us to improve our distribution all around Argentina. What we don't know is what is going to happen with the economy of Argentina, and it depends on the economic conditions all over the world and the region and of course there is a lot of uncertainty regarding this point. But again, I am positive regarding this.

In terms of the margins in CCUA, we increased price a little bit in the middle of the quarter and we benefited about 50% of the quarter of this. And as the operating leverage of CCUA is very high, we are very sensitive to the increase in the cost of raw materials. The cost of raw materials was very high in the last quarter of 2007. The resin-- the cost of one ton of-- the resin spend was $1400 and today, three weeks ago, it was $950; today it's a little bit more than $1000, but 40% or 35% lower than it was three months ago, on the one hand and the exchange rate is not CLP670 pesos, but CLP610; then we are going to experience much lower costs in our soft drink division, on one hand. And we are increasing prices on the other.

Again, the first quarter of 2009 compared with the first quarter of 2008 is going to be tough because the exchange rate in the first quarter of 2008 was very low in Chile CLP500 or CLP480. Regarding the rest of the year, again we're very optimistic in terms of margins and in terms of cost of raw materials.

In other words, what I'm saying is that I think that the more difficult quarter in 2009 is probably going to be the first one, compared with the first one of 2008, which was very good. If we are able to have a good first quarter in 2009 -- and we're working strongly in order to have this -- if we're able to do this, then probably the rest of the year is going to be much easier.

Okay, thank you very much.

Thank you. (Operator Instructions). Mr. Patricio Jottar, I show there are no further questions at this time. Please continue.

Thank you very much. I would like to say again that we are satisfied with the quarter's results. Notwithstanding, they were adversely affected by higher raw material and packaging costs in US dollars and average nominal devaluations of the Chilean peso of 27.1% against the US dollar during the last quarter and a 7.1% yearly inflation.

With regards to 2009, as I said before, we prepared a launch, a contingency plan, in order to improve our market position, decrease our expenses, when we get advantage of the expected lower inflation rates and cost of raw materials. Tough years, as 2009 it seems, will be are good for the long-term vitality of the Company as we are forced to improve our operations in every single aspect. The strength of our brands, distribution system and our experienced staff allow us being optimistic regarding the future.

Thank you, all of you, for attending our conference call and I hope to see you very soon.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using ACT Teleconference. You may now disconnect.