Compania Cervecerias Unidas SA (CCU) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by and welcome to CCU's first quarter results conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). Today's conference is being recorded, May 28, 2010.

I would now like to turn the conference over to Ricardo Reyes, CCU's CFO. Please go ahead sir.

Thank you very much. Good morning and thank you for attending CCU's first quarter results 2010 conference call. The CEO, Patricio Jottar is on a business trip and asked me to conduct the conference call today.

I am here with Rosita Covarrubias, IR Manager and [Carolina Zaldivar], recently appointed IR Analyst.

You have received a copy of the Company's results for the first quarter of 2010. On this occasion, I would like to comment on the result and also address some remarks about the consequences in our operations and the financial statement derived from the earthquake that affected Chile last February. After these remarks, I will answer any questions you may have.

This first quarter, net profit decreased 22.7% as compared with the same quarter last year. As of January and February's performance, it made us to believe that the world financial crisis was over, as far as this year was concerned. However, Chile's February 27 earthquake brought a new challenge for the Company, as well as for the country.

We faced a production interruption that affected our main segments in Chile. Nevertheless, overall we are satisfied with CCU's performance during the first quarter, considering the special circumstances lived in March. The Company's volumes increased in almost all segments, with the exception of Beer Chile, for a consolidated 3.5% growth.

As we informed the market, the brewery in Santiago was damaged and production was interrupted. The contingency plan triggered by the situation reduced the effect to a drop of 7.7% in Beer Chile's volumes in the first quarter.

As mentioned in our March disclosure, the plan consisted in shifting the beer production to the brewery located in Temuco and importing beer mainly from the facilities in Argentina, while the brewery in Santiago was back in production.

When comparing the first quarter figures with those of the same period in 2009, we see that net sales increased 0.9%, due to higher volumes, compensated with a lower average price, explained by the following four reasons.

First, a higher volume growth rate in larger packaging in Non-alcoholic beverage. Second, the effect of the appreciation of the Chilean peso on our Wine exports. Third, the translation effect on the Argentine Beer sales and fourth, because of the earthquake related bottling line problems, the tetra-pack packaging sales in domestic wine grew faster than the bottled wine.

Gross profit is up by 5.9%, mostly explained by 5% lower cost of goods sold, due principally to the appreciation of the Chilean peso effect on commodities and other raw materials. Plus the barley lower prices in dollar this past quarter, as compared with the first quarter last year.

Expenses grew 9.9%, mostly due to higher marketing and distribution expenses, both related with volumes and higher per unit cost. As a consequence, operating result grew 2.2% and EBITDA is 2.1% higher. The consolidated EBITDA margins increased from 27% to 27.3%.

The already mentioned net profit drop is a consequence of a better operational result in the business less affected by the earthquake, more than compensated by a more negative result in non-operational items, mostly lower result of indexed units, higher net financing expenses and higher income taxes.

I invite the participants to review this information in more detail, as well as each segment's performance in the press release you already have access to. Whereas I will address the earthquake situation effects in the book as of March 31.

As we already disclosed to the market, the damages caused by the earthquake of February 27 are adequately covered. CCU and its consolidated and non-consolidated subsidiaries have physical losses insurance policies covering inventory and fixed asset damages and/or destruction, as well as business interruption losses.

The maximum physical damage and business interruption losses indemnity is [$60.4m], which is equivalent to CLP323,000m. The physical damage policies has a deductible per location of 2% of the amount insured, with a limit of $10,000 in each one of them, which is equivalent to CLP210m. And the deductible in the business interruption policy is of 10 days.

In March, the Company recorded in its financial statement CLP13,5000m [sic - see press release] in account receivables to be collected from insurance companies. The amount corresponds to the covered damage in relation to the first destroyed inventory at book value. And second, costs and expenses incurred as of that date in assets repairing, cleaning and order setting tasks, as well as business interruption cost mitigation activities.

In the recorded amount, we have not included fixed assets write-offs, because the Company, together with the claim adjuster, are in the process of the identification of these items that need to be replaced.

The Company has not booked either the deductible amounts that would apply, neither the higher than book value we expect to receive in compensation for first finished product inventory destroyed, in which case the indemnity should be paid at sales price. Second, fixed assets to be write off as a consequence of the earthquake, which are to be compensated at replacement value. And third, income due on account of business interruptions. These three items have been considering contingency assets, and we record it net of deductible as the insurance claims progress.

Now I will be glad to answer any questions you may have.

Thank you sir. (Operator Instructions).

And our first question comes from the line of Robert Ford with Bank of America. Please go ahead.

Yes thank you and good day everybody. Ricardo, I just wanted to make sure I did the math right. When I look at the maximum deductible excluding the ten days of business interruption which was already incurred right in the first quarter, it sounds as if we are looking at a number of about $400,000. Is that correct?

Per location. This is the -- as you mentioned the deductible has two parts. One is related with the damage of physical assets, which is CLP210m per location. So that -- you need to multiply this by the number of the locations that have been affected. We have not yet made public this number. We are -- because we are in the process, in the negotiation process with the adjusters. That is going to be much less of the amount that we have recorded as accounts receivable, which is CLP13,500m.

So the deductible is CLP210m. This is the maximum deductible per location.

And how many locations were affected?

This -- supposedly that were affected, this is our supposition is 10 locations. Then the maximum deductible would be CLP2,100m.

Okay, thank you.

But --

And then -- I'm sorry.

And then, you need to consider that we have booked in our accounts receivable the inventory that was losses at book value, but the policy says that this is going to be compensated at sales price. So we are going to receive an additional amount to what we have already recorded in our account receivables, from the insurance company.

And in addition to that, for the physical assets that are not going to be repaired but are going to be replaced, the replacement is going to be at replacement cost, not at book cost.

And when you look at those three things that you've called your contingency assets, right, the difference between book value and sales price on the inventory, the difference between book value and replacement value on the fixed assets and then the business interruption coverage, what are your initial estimates of those three [names] or line items?

First we think that we are not going to have to recorded a loss because of this earthquake. No effect will be in the worst case. In the better case we are going to have a positive effect because -- and this will depend on how many, how many physical assets need to be replaced, rather than to be repaired. And this is part of the discussion we had already this morning with the adjustors.

Oh, great, that's very helpful. And then if I could just a couple of questions on the business.

And one was just a phenomenal performance in the Non-alcoholic beverage segment. And I can't help but believe that you still had some adverse sugar pricing in the period when I look at the timing of pricing and what you were buying from [Lansa] and my estimates of what you were buying from [Lansa] in each of the two periods year-on-year.

I'm curious as to how much you think the -- some of the panic buying after the -- in the aftermath of the earthquake drove those line figures in Soft Drinks and in Mineral Water and some of the other beverages. And how much you think is just market share improvements.

And then the operating leverage as well was very impressive. And I was curious as to how much of that operating leverage you think we should -- is recurring in nature, please?

Yes. Yes, we have a very good performance in the Non-alcoholic businesses, growing very soundly our EBITDA. And this is because of good volume growth and part of this is a slight market share gain in the quarter, and also the effect of the new packaging we launched, the big package, where we had less market share in that category.

And also, in addition to that, we have the positive effect of the appreciation of the Chilean peso in -- that affected Soft Drinks, the rest of the Non-alcoholic Beverages and also Beer in Chile.

For the rest of the year we are confident that we are going to -- the exchange rate probably will have certain volatility. Yesterday, for instance, it dropped significantly, the day before it increased. So -- but considering that and considering the excellent job we have done with the [punto maxima] program, in order to have the right products in the right places at the right moment and also the drop in the price of sugar, we think that we are going to have a very good rest of the year for Non-alcoholic products.

Okay, great, thank you.

Then if I could follow with one last thing and that is with all the focus on the earthquake, I was just curious as to how the grape buy for your Wine production came in this year. And what supplies are like and pricing are like in general for the high-end varietal, as well as the mass-produced boxed wines please?

Yes, in -- what happened with the price of the grapes is that because -- this is mainly because of the spring, not because of the earthquake. Also we had some effect of the earthquake. Because the spring was not as warm as usual, and rain, the production was lower.

In addition to that, after the earthquake there were some places in the south of Chile were out of water and because of electricity problem and irrigation problem, so that affected also the amount of tonnes produced in this harvest. So the cost of the grape increased significantly and, for that reason, Vina San Pedro Tarapaca increased prices in the domestic market by 8% in April.

That's very helpful. Thank you very much and congratulations on the quarter.

Thank you very much.

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

Hi, I had two questions really.

One, I notice that your -- for obvious reasons your inventory of finished goods is lower. And I'm wondering, for the second and third quarter, if you have, if you will have enough finished goods inventories to meet demand.

And also I am wondering, given what's happening in Europe, how your exports are being affected by that. Do you see a significant slowdown in demand for your Wine exports there? So those would be my two questions please.

Okay. Related to the second, in export volumes to Europe, we have not seen any impact yet. In fact our volumes are growing very, very fast. And what happened is that because of the appreciation of the Chilean peso against the euro, we are collecting less Chilean peso for that.

In the case of the effect of the earthquake on our finished product, of course we had problems in March. But most of the deficit was confined to March, because after the earthquake we start to put in production again the lines in the brewery and also the lines in the Wine operations, the bottling line in the Wine operation.

And most of them were in operation during March, some of them during April. And there we have, still have two bottling lines in the brewery in Santiago that are not in production but are not required at this moment because we are entering into the low season. And these are going to be put in production, one of them, next June and the other next -- at the end of August, beginning of September, after -- before the high season starts.

So we tackled some shortage of our products in (inaudible), mainly in brewery -- in Beer, mainly in Beer, in Chile. But most of this was located -- occurred in the first two or three weeks after the earthquake. Now we are supplying the demand normally.

Right. And in terms of demand levels, are they where you expected them to be in terms of the Chilean Beer operations? Or do you see a slowdown over there due to the earthquake?

What we have seen is that -- well, the March decline that was significantly high. We dropped about 22% our volumes in March. It was mainly because of supply problem, not demand problem. And volumes were performing good in January and February and in April we recovered again the growth that we had in the previous two months. After -- over April of last year, the selling of Beer grew a lot in Chile.

And last April -- you'll remember that last year volumes in Beer were negatively affected because of the financial crisis. But in April we have -- in April 2009 excellent weather. So in April 2009 we grew about 13% our Beer volumes and 11% our overall volumes in Chile. So in April this year we have also very good weather similar to last year and we grew, in addition to the growth that we experienced last year. So we are very happy with the April volumes. And in May -- well we are finishing the month but still we have two days to finish the month -- we maintained that tendency with very good growth in Beer in Chile and also in the other categories.

So we don't see a demand effect, or negative demand effect on our products. Rather that we are very optimistic because the prediction is that the economy is good growth, for the rest of the year. And also we are going to receive the effect of the reconstruction initiative that will create more employment.

Okay, great. That was very helpful.

Just one final question with regard to pricing in your export markets. Is it fair to assume that in euro terms and dollar terms your pricing is going to be flattish? Or do you think that you might have some movement in prices there?

In the export market it is very difficult to move prices because if you move prices to consumer, your volumes are significantly affected. So prices are moved because of a change in the mix and in the past year, there was a change in the mix going from more premium wine to more basic wine. So we don't see any price movement. We are going to maintain prices as they are now.

Thank you very much.

You're welcome.

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

Hello everyone. I have two questions.

The first of the questions is regarding the Beer business in Chile. Regarding pricing, I remember the huge price increase you had in 2008, in the Beer business. The question is regarding if you are expecting some price increases by the second quarter or the -- sorry, the second half of the year in this business?

And the other question is regarding the raw material costs. You have explained about the grape costs. I don't know if you can disclose how much they increased. And how -- what about the barley price, regarding the contract of May? Thank you.

Okay. Thank you, Jorge.

Regarding the beer price movement, the last price was done in August for the premium category in August 2008 and in October 2008 for the mainstream category. And since October, the last mainstream price increase, inflation has been flat, in fact a little negative inflation in the last 18 months.

Since August, inflation has been up almost 2%. So considering that the projected inflation is going to be between 3% and 3.5% annually, probably we are going to study a price increase in the third quarter for premium cate -- premium products , as we did in 2008. And then, after that, we are going to review the situation for mainstream products.

Regarding raw materials. The price of the grape or the price of the wine, the increase was significant, 70% in that range for the basic wine, for the basic wine. That's the reason why basic wine tetra-pack was up 8% in April in the case of our wine operation.

In the case of barley, for this year we're going to have USD520 to USD530 per tonne, compared with USD490 per tonne for last year. This is the increase in the barley cost.

Okay. Thank you.

Welcome.

Our next question comes from the line of Jose Yordan with Deutsche Bank. Please go ahead.

Good morning Ricardo. First is a quick clarification. You said your average barley price was USD490 last year or USD450?

USD490.

USD490. Thank you.

And then, I guess my question is really more when we -- when do you really expect the reconstruction effort to have an important effect on your beer volumes? I suspect that the April and May rebound was partly just a technical, let's say the rebound from the lack of demand in March etc. And that it really doesn't incorporate the effect of the pick-up in construction as that hasn't really got going. When do you expect that to really begin kicking in, for the government spending to really begin to impact your business? Or when will that start to get significantly higher?

Yes, thank you Jose. You are right. Especially in April, the effect of the growth was, in part, related with the [reposition] of inventories that were lost in the supply chain. And also the good weather we have in April. In May, the reposition effect was not there in consumption. Also, we have in the first two weeks of -- in the first two, three weeks of May, very good weather especially in the central part of the country. And that helps our volume grow.

The construction effort will be -- will produce effect on the employment and on the demand, we think, mainly in the second half of the year and in 2011. Because this process will be a long process and will take two, maybe three years, all the construction efforts.

But people say it might last until the next administration. But, so fourth quarter this year is probably a good time to expect it?

Yes.

Okay, thanks.

You're welcome.

Thank you. (Operator Instructions). And our next question comes from the line of Alan Alanis of JP Morgan. Please go ahead.

Thank you. Again, congratulations for the results. A lot of the operating questions that I had have been answered but I had a question regarding Wine and Beer. And it's more of a strategic question. You probably saw what Foster's announced this week, regarding their intention to separate their Beer and their Wine business.

Part of their rationale for this, according to our analysts over there, is because of the leverage that the retailers were taking, in terms of taking away shelf space from the Wine business in order to get better pricing for beer over there. Which could potentially also happen, eventually, in Chile, as you are the leader there in Beer but not in Wine. So I guess, two questions.

Do you see any of this kind of risk happening with retailers in Chile, number one?

And number two, could you remind us in terms of what's the long term strategic rationale of having Wine and Beer together, specifically? Again emphasizing that the largest company that had that joint model just indicated that they are no longer going to pursue it? Thank you.

Yes. Thank you Alan.

Well, as is happening in other markets, in Chile, the supermarkets are gaining market share in the trade and are growing. So the relation is year-on-year more important. For that reason we start a project to analyze how is the best way to perform with the supermarket? And we have started with this project, with the help of our consulting team, to study if the way how we are working now is the best way or if there are other ways to work.

Now how we operate it is that each business segment has an independent relation with supermarkets. So each of them will negotiate independently. Negotiate shelf space or the [wrapper] that they charge, etc. Maybe it is a possibility to have a combination of some categories in one hand. And this is something that we're going to study in the next nine to twelve months and then implement it very, very carefully.

Regarding the long term strategy, the rationale to have Beer and Wine together. In our case -- I don't know the case of Foster's -- but in our case CCU is a multi-category company that has beer, soft drinks and other non-alcoholic products, wine and spirits. And this makes us more relevant to the trade, especially for mom and pop.

So we could reach almost the 100,000 points of sale that we have in Chile with the full family of products. And with the program we have in place, we simplified the work for our sales force in terms of the number of [SBUs] they should offer in each point of sale, taking into consideration the segment and the importance and the relevance, etc.

The other rationale there is that the Wine business has a different seasonality versus Beer. Wine is more important in winter and Beer is more important in summer. So that will help us to dilute costs in the low season for beer and soft drinks. Both have in common brand value, building brand equity in the mind of the consumer and knowing our client and the consumer. So we think that, in the case of Chile, because of the lower (inaudible) we have, the big number of points of sales we attained, it's good to have wine on the portfolio.

If I may just add on that, another sub-question would be how big are the aspirations of CCU in Wine going forward? You clearly are -- I mean you cannot grow too much more on Beer in Chile. I think, what you've said in the past you're pretty comfortable with your investments in Argentina in Beer where there are -- I don't think there's a lot of space to grow there.

But potentially, you could grow a lot internationally on Wine, both domestically in Chile and internationally abroad. So if you could help us get a sense in terms of what the aspirations, or what's the vision there, that would be very useful. Thank you.

Well, the first aspiration is to improve the profitability of the Wine business which is [low all year] versus the higher categories with a return on capital employed in the range of 6% to 7%. And our specific plan is to improve this to 10% to 11% in the next three years -- two to three years. And we hope to do that, mainly improving our domestic operation in Chile, also, our operation in Argentina and our export business. So this additional 5 points -- 4 to 5 points of improvement in return on capital employed is going to be a share of these three categories.

The possibility to grow in Wine. Wine is in -- as we have done in 2008, doing a merger with Vina Tarapaca, Vina San Pedro Tarapaca that improved our domestic operation, especially in the bottled category, or in the more premium wine, where we are now leading the category. We are the third largest winery domestically in the more popular wine. But we are leading in the more expensive wines.

And another possibility is to replicate the model we have in Chile, in Argentina, where we have now a sound distribution in Beer and we could compliment this (inaudible). One possibility is to add wine on that distribution. So one possibility is to grow our Wine businesses in Argentina and that, of course, will include abroad also in the export part of that business, exporting to other countries, Argentinean wine.

That was very useful. Thank you so much and again, congratulations for the very good quarter.

Thank you, Alan.

Thank you. Our next question comes from the line of [Juan Pablo Rosetto]. Please go ahead.

Hi. Good morning everybody. Ricardo, just a question on CapEx. What's the plan for this year in terms of size and what more or less would be maintenance CapEx and what is growth CapEx? And in which areas do you plan to employ more capital?

CapEx, as you know, during 2009 was tight control because of the effects of the financial crisis. So this year we are going to invest more. In the first quarter there was not very significant rise versus the first quarter of 2009. It was only about 4% increase. (Inaudible) our plans looking ahead is that we are building a new distribution centre in Valparaiso Vina del Mar to attend that area.

We are going to build also a new distribution centre in (inaudible) to attend -- serve that area. And looking forward, in 2012 -- between 2012, 2014, we need to increase our capacity in our brewery and in our new [cooking] system and new bottling line for [cans] mainly. So probably what we are going to do is to expand this in Temuco, rather than to expand in Santiago, in order to have a more balanced logistics system.

In the other categories, we are going to invest about 15% to 20% more in soft drinks, because of the growing we have in volumes. We are going to invest, probably, in a new line for bottling nectars and juices. And we are going to explore the possibility to produce both combined [milk] and juices in these two lines that we are going to invest.

Just in terms of big numbers, how much will it be in terms of dollars probably, or pesos for the year?

Alan? (Inaudible).

Si, Rosita.

The (inaudible) is going to be available next week. So if you are a little patient, you will have all the information for the next five years.

Okay, thank you.

Thank you. Our next question is a follow-up question from the line of Jorge Opaso of LarrainVial. Please go ahead.

Hello. Only one question left is about the significant levels of cash of the Company. If you can disclose a little bit more about your plans of the use of this cash, if you want to maintain the same levels or if you can explain this a little bit more, please?

Yes. We have USD100m on cash and our net debt after cash [is very low]. That will aid the possibility for us to increase our debt in case a better position is available. And this is part of the strategy of the Company, to grow organically and also grow non-organically as we have done in the past.

And the main project there are -- and these are not short term but we are patient -- are to increase our stake in the ready to eat business, entering the (inaudible) category in Argentina. Consider another Latin American country and entering the (inaudible) business. So these are the main four projects that we are pursuing for the next five to ten years.

Okay, thank you very much.

You're welcome.

(Operator Instructions). Mr. Reyes, I show no further questions at this time, please continue with any closing comments.

Okay, thank you. CCU has a new challenge for 2010, which is to complete the repairs or replacement needed after the earthquake damages, before the next high season. Secondly, as remarkable as the first quarter was, we expect to see consumption resuming the growth path during the rest of the year, as a result of better economic environment and higher employment triggered by the reconstruction works.

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

Ladies and gentlemen, this concludes CCU's first quarter results conference call. Thank you for your participation, you may now disconnect.