Compania Cervecerias Unidas SA (CCU) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the CCU third quarter results conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

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

Good morning and thank you for attending CCU's third quarter 2009 conference call. I am here with Ricardo Reyes, CCU's Chief Financial Officer, Rosita Covarrubias, IR Manager, and Finance Vice-Manager [Hilman Del Rio]. You have received a copy of the Company's results for the third quarter 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. CCU, for the first time is presenting its financial statements under IFRS. This change will be beneficial for investors because investment decisions will be made on the basis of information configured according to identical principles. Analysts will have a relief because they will converse to you with companies within the industry or across the industry using the same metrics. However, I would not like to dedicate much time to the metrics change issues which you have found in the annex of the press release.

We are very pleased with CCU's performance considering the economic scenario in which we developed our activities during 2009 third quarter. When comparing the figures with those of the same period in 2008, it has to be considered that although the indicators show a modest break in the downward tendency, the overall situation was still adverse for our business, A, the daily average exchange rate was 5.8% higher, which is instrumental because of the raw material costs, but positive for the wine export segments; B, the GDP for the quarter showed a 1.6% year-on-year decrease, which is one-third of the negative figure observed for Q2 2009; C, the unemployment rate for the semester continues to be higher, 2.4 basis points as compared to 2008 and 0.6 basis points as compared to the previous measurement; D, the negative accumulated inflation, minus 0.6% year to date and minus 1.9% year on year, reflecting consumption slowdown was marginally positive for the quarter.

In such scenario, all our consolidated figures showed an improvement versus the same quarter last year. Volumes grew by 3.3%, 1.8 points in response to organic growth. Net sales was up 7.8%. Gross profit increased 11.6%. Operating result was 20.3% higher. Net profit achievable to parent company shareholders increased 35.6% and EBITDA grew 17.8%.

When analyzing the figures by segment, we have that the Chilean beer segments had a high average price of 6.1%, which more than compensates to the 4.7% volume growth. The higher average price is due to the price increase we made in August and October 2008. No price actions have been taken in 2009. The cost of goods sold per hectoliter decreased 4.6%, mainly due to lower production costs. As a result, the cost of good sold as a percentage of net sales decreased from 45.3% to 40.9%. Consequently, the operating profit and EBITDA margins increased 4.8 and 5.1 percentage points to 25.3% and 32.2% respectively.

CCU introduced a more modern image for iconic brand Cristal, seeking not only to promote the brand, but also the per capital beer consumption. The Argentinean business operating results in Chilean pesos increased 10% and EBITDA improved 5.4%. IFRS allows the analysis of the Argentine subsidiary in Chilean pesos, given the lower volatility that this set of rules introduced in the profit and loss statement. This (inaudible) is explained by a 6.3% increase in average price, due mostly to a better mix coupled with the reduction of cost of goods sold from 51.9% to 48%.

Domestic volumes grew 4%, compensating a decrease in exports volumes. All together, operating profit and EBITDA margins increased 0.5% each to 6.1% to 10.2% respectively. The non-alcoholic beverage segment increased its net sales by 10%, mainly as a result of 7.7% and 2.7% higher volumes on prices respectively. The nectar category volume grew 16.9%, followed by soft drinks, 6.3%, and water, 5.6%. Cost of good sold as a percentage of net sales decreased from 52.1% to 50.8%.

Expenses as a percentage of net sales increased from 39.6% to 40.2% as a consequence of the operating profit and EBITDA margins increased 0.7 and 0.4 percentage points to 8.7% and 14.2% respectively. The wine business figures revealed the impact of the merger in the last quarter 2008. Net sales increased by 46.1%, due to a 28.1% increase in volumes coupled with 12.9% increase in the average price in Chilean pesos. Consequently, the operating result grew 41.6% despite the operating margin decrease from 50.1% to 14.6%. EBITDA increased 39.3%. Nonetheless, EBITDA margin decreased from 19.6% to 18.6%.

The spirit business continued with the strategy to focus on higher margin products and certain product market combinations, higher average nominal prices by 2.1%, and lower volumes of 7.8%, together with higher cost of goods sold, coupled with 1.3% lower expenses, deteriorated the operating profit by 13.3% and EBITDA by 9.4%. The operating and EBITDA margin decreased 1.6 and 1.1 percentage points respectively.

Again, we are pleased with the Q3 2009 results because they improved in a difficult scenario. In March 2010, we'll be discussing Q4 2009 results Considering public information, the following change effect is being positive in Q4 as comparing a foreign exchange of approximately CLP500 per dollar with CLP640 per dollar in Q4 2008. Now I will be glad to answer any questions you may have.

(Operator Instructions)

Our first question comes from the line of Robert Ford with Bank of America-Merrill Lynch. Please go ahead.

Thank you. Good morning, everybody, and congratulations on the quarter, Patricio. I was curious if you could expand a little bit in terms of the brand equity investments you're making in Cristal. I know you've launched new -- a new package. You've updated the brand somewhat. And if you could expand on maybe how consumers are responding to some of the innovation, you had mentioned that some of the efforts are done to promote greater per capita consumption. I was wondering if there's any evidence that that's the timing. Any impact initially. And then how you see the pricing environment, competition, and any substitution that might be taking place as well with perhaps some of the lower input costs for the bulk wines.

Thank you, Robert, for your question. Cristal will represent around 50% of our volumes, of our beer volumes in Chile in 2009. In fact, a little bit more than 50% -- 50.5% or 51% of our volume. And we feel very comfortable with the fact of having a flagship and strong brand in our beer portfolio. We strongly believe that the good beer strategy has two foundations. Number one, a good portfolio, and number two, a strong brand as a flagship of this portfolio. Today we have, let's say, 85%, 86% market share in the beer business.

And indeed we feel that our situation would be much more vulnerable if, instead of a flagship brand that was 50% in our portfolio we'd have, for example, eight or nine brands with 10% market share each. Because if it is the case, we do not have a real strong brand in order to defend your position and to promote the per capita of the industry. At the same, the economies of scale in marketing and -- in marketing efforts would not be as efficient as the case when you have a 50% volume with one brand.

This is the reason -- this is one of -- this is one of the two reasons why we are investing behind Cristal. I mean, in order to support a huge brand as Cristal, you need to be permanently innovating in, maintaining its image according to the changes in the market, and reinventing the brand in our way. And this is what we are doing with the new image of Cristal.

At the same time there is -- I mean, there is a second element behind this. We are improving a lot the image of Cristal -- the image of quality of Cristal. The product itself, it's a high quality product and we are not changing there, but we are including the image of the bottle of Cristal, of the label and the image of the execution and the point of sale. Quite important this. And because when you develop a category launching stem premium products, which is the case in our beer segment, you have an advantage in a way.

The advantage is that you promote a category and you bring new consumers with higher margins. The risk is that you -- I mean, if you do not perform well in the mainstream segment, you could create the image in the mind of the consumer that the mainstream segment is not as good quality as it used to be in the past because the real good quality could be represented by premium brand. Then, I mean, it's very important to keep quality in the product and the image of the bottle and execution of the point of sale with the mainstream brand.

In a way -- in a way, the per capital problem of the wine in Chile has had relation with the fact that the mainstream wines are not perceived as good quality wines. And of course, we cannot permit it to happen in the beer business. And we are very confident on what we have done in the past and what we are doing now. The perception of consumers and clients has been really, really good and we are very happy regarding this.

Considering prices of beer, as I mentioned in my introduction, we increased prices by the last time in August-October 2008. You have to remember that in 2008 we have an inflation high of 8% roughly and it was necessary to increase prices in order to face the cost pressures related with inflation in (inaudible) and with inflation of raw materials. Since then, we have been able not to increase prices.

Regarding the future, as always, our policy in the beer segment has been to grow price according to inflation. Not more than this because we would like to keep our category competitive against substitutes. Not less because we do not like to lose profitability on one hand and because we are convinced that we do not increase prices of beer according to inflation which transforms beer in a cheap product. And I think that is not good for the quality perception of the category in the long run.

Thank you. And our next question comes from the line of Jose Yordan with Deutsche Bank. Please go ahead.

Good morning, everyone. My question was about the steep decline in the cost of goods for the beer unit. It was almost -- it was like 440 basis points decline. And I remember that you had done some adjustment to the returnable bottles value last year that impacted your margin and that might have something to do. But I guess if -- I'd love to know how much of that margin improvement was due to the comparison -- the adjustment done last year and how much was due to above expectations declines in raw materials and energy and transportation, as you mentioned in the press release.

Thank you. Thank you, Jose, for your question. As you probably remember, I announced in Q2 quarter -- Q2 conference call that we're expecting the cost of goods sold on the beer business to decrease. And it's what we are seeing in Q3 is exactly this. I will expect it to continue happening in Q4 because in Q3 we partially got cheap raw materials and in Q4 we'll have 100% of the quarter with the cheap raw materials.

At the same time, we are making some savings in energy costs and other related production costs. In particularly, the effect that you are mentioning represents around 3% of the total cost per hectoliter. The effect with the bottles in Q3, which is not going to happen in Q4. But we think or we estimate that the other effects will happen in Q4 where we'll compensate this 3% and we'll generate important and additional effects. Then I am not sure if I understand -- if I understood the second part of your question is related with the transportation costs?

No, I mean, I think it was just a question of getting some breakdown of what the impacts were. But you're saying three percentage points were due to the return on provisions and the rest was raw materials, et cetera.

I mean, Q4 the additional reduction in raw material will offset this 3% and we can rate additional benefits. In fact, we -- all together we expect that the cost per hectoliter in nominal pesos in Q4 to be roughly 8% lower than in Q3 all together here.

This is for the fourth quarter of '09 versus the fourth quarter of '08.

No, fourth quarter 2009 versus third quarter 2009, the reduction is going to be around 8%. And fourth quarter 2009 compared with fourth quarter 2008, around 6%.

Okay. Thanks a lot, Patricio.

Thank you, Jose.

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

Good morning, everyone. Would you remind us what your market share was for third quarter and what the trend has been? And also perhaps a little bit about where are you seeing most of your competition coming from and are they gaining share, are they losing share, a bit more on the competitive environment, particularly in beer in Chile, please.

Thank you for your questions. We do not have accurate information about market share month after month because we do not have official figures published by our competitors. We know, considering the public information in 2008, we got 86.2% market share in the beer business. We estimate that we are losing probably one point and our market share is around 85% in 2009, mainly because of the -- mainly because of the competition in Chile and the increase in imported brand. But again, 85% is just an estimation. We do not have a real figure regarding this. This is in beer in Chile.

In general, if you consider all our businesses in Chile and Argentina we're seeing that, in this year, we are keeping or increasing slightly our market share. The competitive environment is tough in our market, but it has not -- but it's not worse than it was one year ago and we expect it not to be worse in the next 12 months. We have seen the different players focusing on very rational activities in the marketplace trying to protect their EBITDA and EBIT generation because it's not a good idea to -- it's not a good idea to deteriorate your results when you are in the middle of a crisis. And I think that we'll face rational competition. But this is just what we estimate, as you know perfectly regarding competition and competitors, you never know exactly what is going to happen.

Right. And just in terms of consumption of your base categories, do you see -- I mean, over, say, the next four to five years, do you see a shift towards wines and spirits or non-alcoholic beverages versus beer or do you think all the categories are likely to grow at the same pace?

If you consider the total per capita consumption of the beverage industry in Chile, the figure is rather low and around 220 liters per capita. As a total beverage, the category in Chile ready-to-drink. If you compare this figure to -- 220 -- with the total beverage industry in the United States and Spain, there is a lot of room to grow. But in those countries, the total beverage industry per capita, it's around 500, 550 liters.

Even if you consider Argentina, there is a lot of room to grow because (inaudible) is more than 400 liters per capita. We charge the most important gaps in per capita between Chile and Argentina, water, nectar or fruit-based products, milk-based product, beer, and functional products. And those are the categories where we have the higher market share.

There is yet one category where Chile is very similar to United States, Spain, and Argentina, which is soft drinks. Then there is room to grow in soft drinks. It's probably much more limited than in the other categories. And soft drinks we have one -- we have probably the smallest market share of all the categories. Then we see our portfolio is definitely a winning portfolio in order to the face the expected trends for the next five years when you compare it again -- Chile with other countries.

Great. Thank you very much.

Thank you.

Thank you.

(Operator Instructions)

And our next question comes from the line of Celso Sanchez with Citi. Please go ahead.

Hi. I just wonder if you could talk a little bit about some of your higher end brands and how you're using some of the innovation to support them in the portfolio sense. I guess, speaking specifically, talking about Heineken as well as Royal a bit. If you could talk about that, please, at my first question.

Thank you, Celso. We have a philosophy in relation with innovation and our philosophy is the following. When you innovate, there is some things which are going to happen anyway. Number one, you will increase your costs because innovations should be support and they produce some -- you show them in your production lines, et cetera, et cetera. Second, you increase the complexity of operating your portfolio. And third, there is always some cannibalization because the new product, the innovation will bring new consumers and new volumes, but also will cannibalize some of the existing volumes.

In order to compensate these three elements -- cost, complexity, and cannibalization, there is just one remedy and the name of this remedy is margin. Then our philosophy is that innovations in CCU always should have a much higher margin than the current portfolio. Just some exceptions related with particular, it is of the competitive environment. But as a general rule, when we innovate, we innovate with higher margin in order to compensate, again, cost, complexity, and cannibalization. This is number one.

Number two, innovation is a process, a process which bonds on the consumer trends and needs. And we are permanently understanding what is -- what the consumer is demanding. And it's surprising because when you do this job, you realize that many of the innovations that you see in the market place is not really driven by consumer trend, but by -- probably by copying, by innovating what happens in other markets, which is not necessarily good for Chile. Then a process.

Number three, we are permanently innovating, but at the same time, we are permanently evaluating the current SKUs we have in the Company. And as we innovate, we tried to eliminate SKUs also in a formal and well structured process. And finally, in order to be successful with innovation, you need to support innovation a lot when you launch the innovation. But also you need to keep the support for many years.

If you are not committed or if you do not have the resources or the focus in order to really support an innovation -- not in year one, but in year one, two, three, four, five -- until this innovation becomes a real product in the consumption part of your consumer, you will not succeed. Why I'm explaining this? Because today in the marketplace, I think that there is an enormous amount of innovation in many categories. And most of them have not been successful and we think the key behind those failures are exactly not to be -- or not to consider the elements I have just mentioned.

Okay. Thank you. I guess, just generally, I'm not sure if I caught it, but the progression of the higher-end brands as in the context of this innovation, can you speak to -- has the portfolio shifted a little bit away from them, given the economic environment or has it actually helped support them in their price point?

No, no. In the case of the high-end products, exactly what I mentioned. Because when you launch a high-end product usually -- or what we know in most of the cases, these high-end products are very expensive product. Probably the cost of price is a little bit higher than the regular brands, but the margin is much higher. Then you cannibalize -- you increase -- you add cost, you add complexity. You add cannibalization, but you bring much more margin to your portfolio.

What we have experienced in the last many years here, it's amazing because high-end products grow more than mainstream products when the economy grows and also in a recession. I mean, because in 2009, the economy has not been good in our country and the unemployment rate has grown a lot. But these high-end products, in all the categories -- wine, beer, [episco], soft drinks -- I mean, the element to say we charge the high-end products in soft drinks -- are growing much more than the mainstream products.

And we have two interpretations behind this. Number one, it's true that the cost is much higher, but the total amount of money at the end of the day is very limited. Then people under stress because of the economic situation, prefers to pay a little bit more to bring more satisfactory product. This is number one.

Number two, in recessions like the one we are experiencing in Chile in 2009, people buy less of some products like cars, refrigerators, houses and traveling. And while people are saving money in those categories, they have more money to spend in massive consumption products as beer, soft drinks, et cetera, et cetera. For these two reasons, the trend is very good. And in part, despite that we are getting good results in 2009, a scenario where we're not growing our volumes a lot, is a result of the fact that we are getting much more margin from high-end products and from innovations, which is good news. And at the same time, not increasing the complexity of the organizations a lot because we are eliminating a lot of SKUs.

In the case of soft drinks, I mean, so there are not high-end soft drinks because all the soft drinks have roughly the same price. But in a way, they do -- the choices Gatorade, ice tea, which are other categories in our mind are high-end soft drinks. And we see like these categories are growing much more than soft drinks. And we are particularly strong in market share in those categories.

Okay. Great. Thank you for that. And if I could just ask one basic question. It doesn't seem that you're breaking out the prices for the different segments of wine anymore. Is there any way we could perhaps get that domestic export, Argentina average price.

Say it again. I'm not sure -- I'm sure that I am understanding what you are saying. So could you say it again, please?

Sure. The average price for the wine sold domestically via export and in Argentina, could you break that out for us? Right now I think I just see a wine segment overall.

Yes.

Celso?

Yes, hi.

Hello. This is Rosita.

Hi, Rosita.

Of course, we will break this down and I'm sorry for this inconvenience. It was caused by the fact that we changed the systems and we didn't have the breakdown handy.

No problem. We can get it offline then?

We can do this any time during the week.

Great. We'll be happy to follow up with you. Thank you.

Because of IFRS rates on one hand and because of the merger between Vina San Pedro and Vina [Tarapa]. I mean, on the end, we have had some -- I mean, it has not been as easy as to release the press release this --

No problem. No problem at all. We'll follow up with you offline. Thank you.

Thank you. And our next question comes from the line of Jorge Opaso with LarrainVial. Please go ahead.

Hello, everyone. My question is regarding the operating and especially the gross margin expansion in [Aguas], despite the very high sugar prices. I know you had higher volumes than the average prices this quarter, but it would be useful if you can detail a little bit more this operating expansion regarding, for example, the main operating initiative that you have been implementing since last year. Thank you.

Thank you, Jorge. I mean, it's true that it's -- I mean, it's a pity what happened with the sugar price because we're experiencing a lower price of raw material in almost all our categories. And at the end of the year, we're expecting also sugar to follow the same path. But unfortunately and because of the problems you know perfectly, the price of sugar got historically high price in 2009. In spite of this, we were able to keep the unit, cost of goods sold and the control. In fact, they decreased a little bit.

And just one piece of information -- the price of sugar implicit in the Q3 results is $670 per ton. One year-and-a-half ago, the price was $500 per ton. And we expect, in a few months, is to be $630 and to be again $500 in the near future. But again, regarding price commodities, we never know exactly what is going to happen. But again, Q3 seems to be our peak in terms of the price of sugar. And we are very happy because all the operational efforts we have made in Aguas -- and not jus tin Aguas, in all the production areas, allowed us to compensate this. And again, we expect to have better news regarding this in Q4 and in 2010.

Okay. Thank you.

Thank you. And our next question is a follow-up question from the line of Jose Yordan with Deutsche Bank. Please go ahead.

Hi, Patricio. Last time we met, you were mentioning that because of the unemployment, especially in the construction area in Chile, that the rebound -- as the economy rebounds in Chile, that other categories are leading beer. That beer is sort of lagging behind many of the other categories as a result of its exposure to the construction industry. Can you give us an update as to what you see happening there? There's some signs that the construction activity is going to pick up again. And so when would you expect the beer market as a whole to begin rebounding and reflecting the rebound in the economy? Is it three months, six months, how do you -- what's your current view on this?

Thank you, Jose. What you are saying is exactly what I have mentioned many times in this -- in the conference call that I held with you. And the unemployment rate in Chile is high and it's particularly high in the construction area where we have a heavy consumers of -- heavy consumers of beer. And this is the reason -- one of the reason why the beer category is suffering more than the non-alcoholic beverage category where the consumption is in every single person and family in Chile. It is much more distributed.

We are not experts in the construction industry, but of course, we are permanently following what happens there. And we expect to rebound volumes and growth in the beginning of -- in the first quarter of 2008. Again, it's what we expect. We do not know exactly what is going to happen, but we are positive regarding 2010. And if it's the case, we'll face 2010 with good volumes and good margins. This is at least what we expect to happen.

Okay. Thanks a lot.

Thank you, Jose.

(Operator Instructions)

And at this time we have no further questions. I'd like to turn the call back over to Mr. Jottar for any closing remarks.

Thank you. Almost a year ago when we perceived that the economic order was about to change, we built a contingency plan which would allow us to run the business focusing on one goal -- to preserve in 2009 the 2008 EBITDA. We can say that because of all the measurements taken and because of the fact the economy was not as bad as we expected a year ago, we are in the right track to accomplish the goals since we are not only -- since we not only have maintained the 2008 EBITDA, but increased by 17.8% in the quarter and 13.7% year to date. And again, I would like to say that we remain confident as always with respect to the future of CCU. Thank you for attending our conference call and I hope to see you soon.

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