Compania Cervecerias Unidas SA (CCU) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CCU Second Quarter Results Presentation on the 7th of August, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I would now like to hand the conference over to Patricio Jottar. Please go ahead, sir.

Good morning, and thank you for attending CCU's Second Quarter 2009 Conference Call. I am here with Ricardo Reyes, CCU's Chief Financial Officer, Rosita Covarrubias, our Manager and Finance [Side] Manager, [Herman del Rio]. You have received a copy of the Company's results of the second quarter of 2009. 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 pleased with CCU's performance, considering the adverse domestic, as well as international economic scenario, in which we have developed our activities during the 2009 second quarter. When comparing the figures with those of the same period in 2008, the following has to be considered. A, the GNP has a negative variation of 2.1% during the first quarter, and economic activity dropped 4.4% in the second quarter of 2009. Along these lines, unemployment statistics published recently show a 10.7% unemployment rate for the period April/June, which is 2.3 points higher than the rate observed a year ago.

Three, the daily average exchange rate for the quarter was CLP567 per $1.00, compared to CLP471 per $1.00 in the second quarter 2008. A depreciation of the Chilean peso vis-a-vis the US dollar is detrimental for CCU because raw materials indexed to the dollar become more expensive in Chilean pesos, regardless of the commodity's prices.

In such scenario, with unfavorable economic indicators, we are able to increase sales by volume in almost all segments in which we participate, except for spirits and beer in Argentina. The total volumes sold increased 4.3%, and revenues grew 3.5% above the 2008 second quarter figures. As to the latter, it was adjusted by a 3% inflation factor for the 12 months. Out of the total volume growth, 3.1 points correspond to organic growth. In the described economic scenario, we were able to increase EBITDA by 1.4% in real terms with respect to the second quarter 2008 figures.

EBITDA would have increased by 4.4% if we had not had the negative effects due to the Chilean currency and particularly quarter appreciation in the conversion of our Argentine affiliate's results, which is disclosed in the beer Argentine chapter of the Q2 2009 press release. Although this conversion effect is always present, it is worthwhile to be mentioned in this opportunity because of the significance of the exchange rate variation effect in the low season quarter.

EBITDA increase is a particularly meaningful accomplishment, since CCU has not yet enjoyed the full benefit of the raw material cost reduction due to stock depreciation, and therefore costs have been significantly higher in comparison to ones in the second quarter 2008.

The Chilean beer segment has a higher average price of 4.6% in real terms and volumes, 3.8% higher, resulting in a 7.6% increase in revenues. The cost per hectoliter are mainly due to higher cost of malt, increasing the cost of goods sold from 43.8% to 47.8%, as a percentage of revenues. Consequently, the operating profit and EBITDA declined by 5.1% and 1.1%, respectively.

For the second half of the year and subject to exchange rate behavior, we expect to see a cost grip. The Argentine beer business needs to be analyzed in dollar terms in order to isolate the currency translation effects described in the press release documents. In such terms, revenues increased 11.1%, operating profit increased from negative $0.5 million to positive $1.8 million and EBITDA improved 91.4%. This performance is explained by a 12.8% increase in average prices, due mostly to a better mix, partially compensated by a 1% decrease in volumes.

The non-alcoholic beverage segment increased its revenues by 5.3%, mainly as a result of 6% higher volume and plus average prices in real terms. There was a category volume view of 9.8%, followed by nectars, 7.9%, and soft drinks, 4.6%. The cost per hectoliter is higher because of the cost of sugar in Chilean pesos is caused by the higher US price, as well as a higher exchange rate. Higher distribution expense per unit combined with a larger volume and higher investment in part explains mostly the higher expenses. As a consequence of the operating profit, EBITDA decreased 12.2% and 4% respectively.

The wine business revenues increased by 41.2% due to an 18.2% increase in volumes, coupled with 19.8% increase in the average price of Chilean pesos. Both effects are mainly explained by the merger between Vina San Pedro and Vina Tarapaca. The higher unit costs due to raw material costs and high expenses due to a larger operation versus the merger compensated to the higher revenues. As a result, the operating profit decreased 10.4%, but EBITDA increased by 13.8%.

The spirit business continued with its strategy to focus on higher-margin products, such as premium products and cocktails. Higher average real prices by 2.4% and lower volumes of 7.5%, coupled with 16.7% lower SG&A improved the operating profit by 6.1% and EBITDA by 8.3%.

The most significant single item affecting the quarter from our P&L point of view is the one-time profit generated on the sale of 29.9% of Aguas CCU Nestle SA. Equity to Nestle Waters Chile SA amounting to CLP24.5 billion pretax. The exercise of the option by a world-class bottle player played its recognition for potential in the water business.

Notwithstanding, we're still in the process of migrating to IFRS. The company preliminarily has estimated a depressing quarter's net income under IFRS could be [CLP31.870 billion] as compared to CLP29.896 billion, resulting from the application of Chilean GAAP rules and to CLP9.509 billion in Q2 2008 under IFRS rules.

I would like to advise that the final IFRS results could differ from these figures which are just estimations. Therefore, any decision should be based upon Chilean GAAP financial statements.

(Operator Instructions).

Thank you. The first question comes from Alan Alanis. Please state your company name, followed by your question.

Hi, this is Alan Alanis with JPMorgan. I wish a good morning to everyone. My question has to do with the following. You're emphasizing that gross domestic product in Chile has declined 4% and that unemployment has increased to over 10%. However, you are showing very strong volume growth both in beer and soft drinks in Chile. And certainly it's not explained by lower prices. Could you walk us or give us some more color regarding what's driving the volume growth in Chile, and specifically in terms of brands, presentations, upsizing or other initiatives that you might be doing in the market?

Thank you, Alan, for your question. We are -- our common effect in both categories, beer and soft drink, and particular effect in the soft drink category. The common effect in both categories was weather. I have to say that weather was particularly good during Q2 2009, which are good news for our business, reason number one.

And, number two, we have been doing a big effort during many years to improve our execution at the point of sale through a Plan Punto Maximo program, and I would like to say that I'm still very proud about the quality of the situation we are getting in the point of sale by improving the segmentation of each one point of sale and by improving the route to market by each one of them, by identifying very well which is the kind of product and packaging and the marketing efforts that we should do in each point of sale.

I would say that these two elements are the proposed business. In the particular case of soft drinks, as you know, we have been putting more focus on the non-cola categories for many years. I mean, it has been our strategy. And we are very glad to say that this strategy is getting us very good results, not just in this quarter, but for many quarters and years because the water, sport drink and nectar categories are growing much than the cola segment and we have higher market shares than our competitors and higher margins there. This is the answer, Alan.

Okay, thank you. Just if I may follow-up with you then, then if I understand correctly, you have not done any meaningful upsizing in your beer operations in Chile in the last 12 months?

What do you mean with upsizing?

Meaning increasing the size of the bottles, either from 600 ml to 630, 650, et cetera, or starting to -- yes, I mean, changing some of your returnable bottles from an existing size to a larger size. That's what I meant, Patricio.

Thank you, thank you, no. No changes regarding this.

Okay, good. And one final, final question would be could you comment on your market share in beer in Argentina, Patricio, please. What are your trends that you're seeing there?

Yes. As you know, Alan, in April 2008 we bought [Stat] operations, both the brewery and the brand. And before that acquisition, our market share was roughly 16.5% and the market share of the brands acquired was roughly 5.5%, 5.8%. If you put the two operations together, you have or you get a 22.5% market share.

The brands we bought were mainly the discounted brands, or 90% of the volume we bought were represented by Palermo and Bieckert, which were brands that were selling at a 15% to 25% discount compared with [Keyism] with our mainstream brands. 10% of this volume was Palermo, which was a premium band. But again -- excuse me, in [Periodo], we just have premium brands. But most of the volume was represented by --

Palermo.

Exactly, by Palermo, which is a discount brand. And I discussed about it a year ago, but the distribution of those brands were made by Chile, which was committed to make the distribution of these brands to [Ixa], which was the owner of that operation, and Quilmes has the commitment to keep the market share. Otherwise, they were obliged to pay some fees, et cetera, et cetera.

In order to do this, they put a lot of pressure into the market in order to keep the market share by discounting a lot and by doing special efforts. When we brought those brands, we were not willing to do the same kind of efforts, because our idea was to make this operation much more profitable. And we began to cut discounts and increase prices a little bit and to diminish the pressure in the market. And we're expecting to lose 30% of the market share.

We bought probably 1.5 or 2 points, improving from 22.5%, probably to 21% market share, to 20.5%. Fortunately, we have been able to keep our volumes and at the same time to increase prices and diminish discounts, and I would say that the crisis has helped us, because some -- many consumers shifted from regular beers to discounted beers. Then we have been able to keep our market share in around 22%. But we prefer to think that the long-term -- then, today, our expectation is to keep our market share and not to grow it and to make much more profitable operations with our 22%.

Excellent, thank you. That was very useful. Congratulations. Bye-bye.

Thank you.

Thank you, sir. The next question comes from Melissa Byun. Please go ahead with your question, following with your company name.

Hi, this is Melissa Byun from B of A/Merrill Lynch. Thank you. I just had a few questions. The first is if you can provide us with an update on your cost outlook and margin expectations for the second half of the year, particularly in malt and energy and some of your other major inputs. And the second question -- I can give them all to you at once, but the second question is --

Please.

Sorry?

Business, or sorry, please go ahead, Melissa.

The second question is just what you're seeing in terms of volume and competitive dynamics in the quarter, and then I was just hoping you could also give us some more detail on what's driving the SG&A improvements and how much is coming from lower marketing spend versus other cost savings initiatives. Thanks.

Thank you. Thank you, Melissa, for your questions. Regarding costs, probably the -- I mean, the most significant effect is that for the second half of the year, compared with Q2, is what is going to happen with the malt. Because in the case of energy and in the case of other raw materials, we have been benefiting from the effects in the second quarter.

Particularly in the case of malt, we expect our direct costs in the year, all included, including malt, to be 5% lower than Q3, compared with Q2, on real terms, and 9% lower from Q4 compared to Q2 in real terms again. This is beer in Chile. To decrease our direct costs by 5% in Q3 and by 9% in Q4 is going to be very significant for our results in the second half of the year.

Regarding SG&A, I mean, the figures are not easy to compare, because we have in Q2 2009 all the costs of Vina Tarapaca, which was merged with Vina San Pedro In Q4 2008. Then when you compare Q2 2009 with Q2 2008, you have to factor out the Vina Tarapaca or the wine business in order to make the comparison.

If you do this, you could see these figures in the press release. Our SG&A decreased by 4.6%. With the wine business, they increased by 2.1%, but again the real figure is that decreasing by 4.6%. And we decreased our marketing spend a little bit more than this, but factoring out marketing spends we still have a good decrease in -- a good decrease in SG&A.

Having said that, I would like to say that the fact of decreasing marketing spends is not detrimental to the brand equity of our brand, because we have increasing marketing efforts, mainly through less expensive contracts, and not through less amount of marketing efforts in the mind of our consumers.

And if you look specifically at the Chilean beer business, what was your marketing investment as a percentage of sales this year versus last year, and did your actual airtime or share of voice remain constant?

Yes, I mean, the marketing in the Chilean beer business, the marketing raised in both soft and hard in 2000 -- excluding those expenses we made with supermarkets, which are considered marketing efforts for the Chilean GAAP, but we do not consider marketing efforts in the rate I'm going to say to you immediately.

Our marketing rate was something like 7.8% to 8%, 2008, and this year it's going to be a little bit more than -- no, I would say it's the same, the same amount, a 7.8% or 8%, probably 8.1%, because we expect to increase our marketing efforts in the second half of the year. It's going to be financed by the lower direct cost. But it's putting all together we're going to have at the end of the day the same marketing rate 2009 compared with 2007. Again, factoring out marketing expenditures which have relation with our efforts in supermarkets.

And then what are you seeing in terms of the volumes and competitive dynamics and pricing this quarter?

As you know, Melissa, we prefer not to make projections on volumes for the future, but I would like to say the following. I feel very confident in the economy of the world, and particularly in the economy of Chile. And I think that volumes will resume growing sooner than later. Then I prefer to have my brands, or our brands, in a very safe position and a very good position to capture the future growth of the market.

And I am positive regarding the future, and that is it. When volumes start going to grow, again, Q3, Q4, first half of 2010, second half of 2010, I prefer to not make projections, again, because it's not our expertise. But we assure that sooner than later it's going to happen, and we are going to behave as it's going to happen.

Okay, thank you very much.

Thank you, Melissa.

Thank you, madam. The next question comes Sohel Amir. Please state your company name, followed by your question.

Good morning. This is Sohel Amir from Lucite Research. Three questions, actually. You mentioned a little bit about cost of malt coming down. If you could perhaps tell us what is malt as a percent of your total input costs? Secondly, if you could talk a bit about inflationary environment in Chile and Argentina and how do you expect to react to that environment in terms of price increments?

And, just thirdly, in terms of the profit you've made from the sale to Nestle, I'm wondering if that profit has been translated into the tax paid on the profit? So does your effective tax rate include the benefit that you reap from the sale to Nestle? So those are my three questions, please.

Thank you Sohel, for your questions. Could you repeat the third question. I'm not sure if I understood you well. You need to --

Sure. Your effective tax rate is about 9.9%, right, for the quarter? Now, I'm wondering, like, if you've had about a 22 billion profit on the sale to Nestle, you would have had to, I'm assuming, pay tax on that profit.

Okay, I understand. Thank you, thank you. I will ask Ricardo Reyes to go through it, but let me answer first of all your first two questions. Regarding inflation, our policy has been to move our prices in Chile according inflation. We expect inflation to be 0% or probably less this year. Until then we do not have in our plans to increase prices in the second half of the year.

Next year, we do not have an official projection. Today, I will expect for this before analyzing then we should revise in 2010 if it is necessary. But, again, in the other terms we have been increasing the last many years prices according with inflation.

In the case of Argentina, it's much more difficult -- it's much more difficult to say, but what we have been able -- reduce prices more than our cost in the last many quarters, and we expect to do this in the future and consequently we expect to improve the profitability of our business there. That is what I could say regarding Argentina.

I mean, the percentage of malt is not always the same, because we present from the percentage of sales in one-way packaging, which affects the total direct cost, but roughly it's between 40% to 50% of our direct costs.

And now I will ask Ricardo Reyes, our CFO, to answer the tax question.

Regarding the tax rate and the extraordinary gain we obtained from the sales of this 29.9% on Nestle, that amount was about CLP24 billion, before taxes, and taxes was roughly the tax rate of the Chilean -- in Chile, the increase is 17. What reduced the tax rate to 9.9% is that in our hedge policy, we have some hedges that are affected by taxes and have some hedges that are not affected by taxes.

So, we go over the situation, looking zero effect in the bottom line. So this quarter, we have a negative effect in foreign exchange to offset what would be a positive effect at tax. And that's what's happened with the quarter.

So just to clarify that point, so the effective tax that you have in the second quarter, that includes the tax you would have had to pay on the profit from sale to Nestle.

Yes, this included it.

Okay, and just going back to the question on malt as a percentage of total costs, so the figures are very helpful, but I'm just wondering if you can give some guidance in terms of you said a 5% reduction in the cost of malt in Q3 and another 5% in Q4.

So what would it imply as a percentage of sales. How many --if, for example, your costs as a percent of sales are X amount, would that figure come down by 100 basis points, 200 basis points, if you have that number only?

Yes. Look, the decrease of 5% of Q3 compared with Q2 is not in the malt component. It's in the total direct cost. And the additional 4% for Q4, it's again in the total direct cost, not just malt. The effect of the total decrease of 9% in Q4 compared with Q2 represents roughly 3% of the price of the beer as an average.

Got it. Thank you. That was very helpful.

Okay.

Thank you, sir. The next question comes from Alex Roberts. Please state your company name, followed by your question.

Right. I'm from Santander. Thank you, everybody. I wanted to kind of get into the beer assets, both in Chile and Argentina. A and if you could give us a sense of how -- we have the full beer volume growth rates, but how was the behavior between the premium segment and the mainstream in each country? Have you been seeing some trading down among the consumers? If you could give us kind of an outlook on those relative growth rates and kind of how it looks out when you think about kind of into the next few quarters.

Thank you, Alex. I mean, before the crisis, the premium segment was -- I'm going to say first in Chile and then Argentina. Because before the crisis the premium segment was increasing at a much higher rate than the regular segment. In this quarter, I mean, this semester, Q1 and Q2 2009, the premium segment is still growing at a high rate, but not as high as it was before the beginning of the crisis.

Before the beginning of the crisis, the premium segment was growing 20% more than the regular one and today it's growing 5% more than the regular one. Chile, we almost do not have a discount segment. I mean, it's very small, because Chilean consumers are not very fond to discount brands. Then it's not that meaningful.

In the case of Argentina, same kind of relation between the regular segment and the premium segment. In the case of Argentina, as I said before, the discount segment is an important segment, because there are very old brands which are participating there, and the Argentinean consumer is willing to drink those beers, as Palermo, [Yieques], et cetera. And in the case of Argentina the discount segment also has grown more than the regular segment in this period.

And we expect it to happen probably in the next two quarters, and as soon as the economy resumes growing and the coming rates begin to decrease, we expect consumers to move to their traditional tendency regarding their patterns of consumption.

Okay, that's helpful. Can you just remind us in both countries the percentage of premium beer as total -- of total beer, in your own portfolio, please?

Yes, in Chile, it's around 11%. Total market, in Chile, it's around 11%, and Argentina is around 8%. In Chile in our portfolio it's very similar to the market. We have 87% market share. We have a lot of similarities with the market. And in the case of Argentina, it's a little bit higher than the market because of the importance or the relevance of Heineken in our portfolio.

Okay, okay. And just the last question, going back to costs, we've heard your comments on the beer side. But when you look at kind of the non-alcoholics, and I'm thinking really -- I mean, mainly of soft drinks, but that non-alcoholics category, we've seen I guess sugar hit a three-year high here.

And I'm just wondering how you're handling this. And to the extent that you're getting some cost relief in the packaging, I guess I'm thinking here PET, is that going to be enough to offset this? And I guess kind of the main question is, when you think about costs in the non-alcoholics in the second half of the year, on a net basis, do you think you'll still have some pressure, or might you get some cost relief?

Yes, the situation in the non-alcoholic side of the business is not as good in relation of the business in the beer side of the business, precisely because the price of sugar is particularly high, which is not the case of malt. Having said that, we have three advantages. Number one, the price of PET is lower. Number two, exchange rate, or the Chilean exchange rate, or the Chilean peso is going to be more appreciated in the second half of the year, compared with the second half of the year of 2008.

And these three effects probably are going to offset. We'll not have the benefit of less 5% or less 9% we'll have in beer, but we'll not have an increase in our direct costs. In fact, probably, we'll have a small decrease when we put these three effects together. This is number one, but number two, and the certain stage is that we are increasing our margins a little bit, because we're improving day after day the quality of our portfolio, by increasing the importance or the relevance of categories with higher margin than soft drinks.

Putting these elements together, we feel I would say optimistic or comfortable with our ability to get good results in the non-alcoholic side of the business in the second half of the year.

Great. Thank you, that's helpful. Thanks.

Thank you, sir. The next question comes from Jose Yordan. Please state your Company name, followed by your question.

Good morning, from Deutsche Bank. I guess most of my questions were answered, but, Patricio, I just wanted to get back to the pricing question on Argentina. I just would like to get some color on in local currency terms, translated into dollars, what have been the trends in your pricing in Argentina, let's say, since the end of last year or since third or fourth quarter of last year. Where has that gone when you exclude the distortions of the Chilean GAAP accounting?

We clearly have -- hello, Jose. Thank you for your questions. We already have the figure. Look, we have been growing at an average our price in Argentine pesos by 20%, average, in the last three years, which is more than official figures of inflation on one hand, but it's more important, it's more than the rate we have increased our costs, is the reason why we have been able to increase our results.

And we expect it to continually happening. We see or we realize in the marketplace the willingness of our competitor, Quilmes, to increase price, to cut discounts, because they need to generate cash flow, as it's publicly known. And, of course, it helps a lot, and we expect this trend to continue.

So you've well over $60 a hectoliter at this point, then.

Exactly, yes. A little bit more than $60, in fact. In Q2, the official figure was $59.31, but we increased prices by 4% to 4.5% recently, two weeks ago, roughly, or three weeks ago. Then we expect to have a better price in dollar terms in Q3. I mean, of course, it will depend what happens with the exchange rate in Argentina, but if nothing happened, and this is what we expect today, we will see it -- we will see an increase in our average dollar price Q3. And, again, we expect this to be the trend for the future.

Okay, thanks a lot, Patricio.

Thank you, Jose.

Thank you, sir. The next question comes from Celso Sanchez. Please state your company name, followed by your question.

Hi, from Citi, thanks. I just wanted to ask a little bit about the SG&A discussion on the Chilean beer side. Obviously very impressive so far this year in terms of as a percentage of revenue, but just wondering if you could clarify a bit more. You did talk about the favorable advertising and promotion contracts, or, I'm sorry, media spend contracts.

But that sounded like, if you could clarify for me, that you were talking about a ramp up in that ratio in the second half of the year, so if you could just elaborate on that a bit and also the -- if not, give us an idea of what it is that you're doing differently that's keeping SG&A under such control.

Yes, thank you, Celso, for your question. I feel like I discussed this two conference calls ago, the contingency plan we elaborated for 2009. I mean, in September, October, we elaborated our budget for 2009 and in those days we are assuming that our volumes are going to grow very little and stay 1% or 1.5%, and no more than -- in December, we're much more pessimistic about the future. More than pessimistic. A lot of uncertainty was in all the markets and we really didn't know what was going to happen in 2009.

Then we elaborated a contingency plan, and the purpose of the contingency plan was to make the budget in terms of operating profit generated by a 1.5% increase in volumes, even if we have a volume 6% below budget, which is the reason why we established the 6% figure, because our analysis was the following. What happens if we lose 1 million hectoliter of our budget in 2009 and one 1 million hectoliters is roughly 6% of our volume.

Then we -- during December, we devoted the 90% of our free and non-free time in order to create a company able to make its budget even in a scenario of losing a million hectoliters -- this is in all our business plans. Then we broke down the million hectoliters in the different business units and all the business units were conducted.

And we generated a lot of -- we generated a lot of initiatives and a lot of actions in order to do this. And, of course, it has been helping us during the first half of the year. Of course, we keep it completely flexible and we have not lost 1 million hectoliters. On the contrary, we have been growing our volumes and because of that we were not so stern in the marketing side of the business.

But again, we are very flexible in this point. And what I could say something today and in one more week we could change -- we could change our idea on marketing or marketing efforts, depending on what happens with our marketing share with the efforts of our competitors, with our volumes, or with our expectations, the prices, to be over, or our volumes to grow.

But again, let's go again to the contingency plan. In the contingency plan. In the contingency we had a lot of the costs and one-third of them were related with marketing efforts, but two-thirds were related with non-marketing efforts. And we have implemented most of those plans. Then we are benefiting now from most of these things. In fact, I would like to say that many things could happen in the second half of the year, but I feel a little bit comfortable optimistic for many reasons.

Number one, the contingency plan is there and most of the actions were implemented in the first half of the year and will benefit from then in the second half of the year. This is number one. Number two, we expect volumes not to be as bad as we thought when we elaborated the contingency plan.

Number three, the exchange rate is going to be much convenient for us in the second half of the year, compared with the second half of 2008. Number four, some raw materials are going to be much cheaper, as I discussed before in relation with the malt costs.

If all this happens, we are going to be a little bit more aggressive in our marketing efforts, because we'll be saving a lot of money in all the other dimensions, which is the final combination discounting is something we are deciding day after day. But I think that we have the tools to generate a good bottom line in the second half of the year, completing -- and I'm putting this together with the fact that we got a good first half of the year.

We are optimistic about 2009 as a whole, and of course here in front of me I have the budgets and the estimations for the decimals for each one of the elements I am discussing about. But we do not like -- we do not like to make official projections on one hand. And, on the other hand, everything could change tomorrow because, again, in periods like this, it's important to be very flexible.

But I mean, what is important to mention, Celso, is that we have been able to create the tools, the necessary tools, to face the tough scenario. Of course, we should execute them and of course we could fail at the time of executing, but I feel comfortable on our ability of executing.

Okay, thank you for that. And if I could just follow-up on the COGS question, I know you've talked about it many times in many different ways. Just to make sure I'm clear, though, the minus 5% and minus 9% relative to the second quarter that you spoke of, is that just for malt and just in local currency, or is that for all COGS? And, again, can you clarify if that includes the impact of FX or no?

Yes, it's total direct cost in real local currency.

Thank you very much.

Thank you, Celso.

Thank you, sir. The next question comes from Jorge Opaso. Please state your company name, followed by your question.

Hello, everyone. The company is LarrainVial. Almost all questions were answered. Only regarding the wine business, wondering about the decrease in operating margins if you can please detail. I know you had the higher raw material costs and also you had a higher effect of premium wine costs.

I wonder if you can detail about the sales mix, if you can quantify in terms of margins the effect of the lower sales mix and when do you expect more premium wines to be more present in your sales mix? I don't know if the decrease effect was like 100 basis points, something like that, in your operating margins this quarter. Thank you.

Thank you, Jorge, for your question. As you know, and as you mentioned and as you could imagine, it's very difficult to analyze to say figures of wine, because the combination of both companies on one hand and the variation of the exchange rate addition the price of the grapes and the raw materials on the others creates a lot of dirty in the analysis.

And this is number one. Number two, I mean, I prefer to say that things are happening satisfactory regarding what you saw at the moment of the merger. Of course, when we decided the merger, we're not expecting the price to come. We're not expecting our volumes to decrease, and we need to isolate this, because this is going to change. In fact, the trend of volumes in the last months have been very satisfactory, and much better than in the first part of the year. But, number one, we are getting all the cost reductions we're expecting.

Number two, and a little bit ore -- even a little bit more. In fact, when we made the merger, we made public or official the expected figures of synergies, and today we are expecting to get a little bit more synergies, and we are getting a little bit more synergies than we officially informed at the very guidance. This is number one.

Number two, in the case of the Chilean market, we are proved -- and in the case of the export side business, we are improving the percentage of -- the percentage of fine and high-priced wines in our portfolio, not in the whole year, because January, February, March and April were very tough for premium wines. But this situation is beginning to change a little bit in the last two months. We don't now what is going to happen with the exchange rates for the future, but we need to learn how to live with this in the wine business, and for CCU as a whole the Chilean peso appreciation is a good news.

But putting all together, better synergies, better trends in terms of volumes and a portfolio which is beginning to improve little by little, I feel comfortable about our ability to generate good results in the future with wine. The results in Q3 and Q4 are going to be very bad, dirty already, because many effects are already present, or will be already present in these two quarters.

Okay, thank you, but if you see for example the first quarter, the effect in operating margins in the wine business was much lower, comparing to the previous quarter. You have in this quarter a much more remarkable effect. I'm wondering if it's -- if you can explain that almost by the sales mix. Isn't that the most important effect? Because you had the effect of the higher rate cost in both quarters, so is that the most important rate effect that explains it or not?

I'm not prepared, Jorge, to answer precisely the question you are making.

Okay. Okay, thank you very much.

Thank you, sir. The next question comes from Antonio Gonzalez. Please state your company name, followed by your question.

Hi, good morning, this is Antonio Gonzalez from Credit Suisse. I wanted to see if you could give us some color on how have your returns on invested capital for the beer division been improved since the acquisition of Ixa, and where do you see your returns on invested capital in the long term in this division alone? And then the same question for the wine business.

Thank you, Antonio. Before the merger, our return on capital employed in Argentina was 9%, roughly. And after the acquisition of Ixa, at the very beginning, we increased a lot our capital employed, but very soon we got the same 9%, and we expect this year to close at an even higher return on capital employed. In other words, the side is we increase our capital employed by increasing EBITDA. We didn't renew our return on capital employed on year one. On the contrary, we have been able to keep it, and on year two it will be constructive on return on capital employed.

Long term, we'd like to have 20% return on capital employed there. In the case of the beer business, the return on capital employed has been very low, roughly 6%, 7% average in the last four to five years, which is an acceptable and very low and lower than our cost of capital, which is 9.3% today. And our expectation is to increase this to 9% as soon as possible, because we do not like to destroy value there, and we think that a good long-term rate would be 12% to 13%. We do not expect to be able to get 20% there, as we expect to do in Argentina.

Great. Very helpful, thanks.

Thank you, sir. (Operator Instructions).

After half a year of economic upheaval, we have conducted our business successfully, having the flexibility to act according to the circumstances and yet following the longer-term overall strategy. This is what we have been pursuing and as I discussed in the conference call, this is what we expect to do in the second half of this year.

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

Thank you, sir. Ladies and gentlemen, this concludes the CCU Second Quarter Results Conference Call. Thank you for participating. You may now disconnect.