Compania Cervecerias Unidas SA (CCU) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CCU's Second Quarter Results Conference Call on today, the 11th of August, 2010. (Operator Instructions). I will now hand the conference over to your host, Mr. Patricio Jottar, CEO of CCU. Please go ahead, sir.

Good morning and thank you for attending CCU's Second Quarter 2010 Conference Call. I'm here with Ricardo Reyes, CCU's Chief Financial Officer, and Rosita Covarrubias, IR Manager. You have received our copy of the Company's results for the second quarter of 2010. 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 my comments, I will gladly answer any questions you may have. We are pleased with CCU's second quarter 2010 results. The total volume sold increased 9.7% and the average price was 4.5% higher causing revenues to grow 13.2% above the 2009 second quarter figures we stated to IFRS. The cost of goods sold increased 6.9% and, as a percentage of net sales, they decreased from 50.8% to 48%. Such improvement is mostly explained by the effects of the peso appreciation on the dollar indexed raw material costs.

As a consequence, the gross margin increased from 49.2% to 52%. MSD&A expenses, as a percentage of net sales, remained almost flat, varying from 36.8% in 2009 to 37% in 2010. Despite the higher marketing rate, we increased from 5.9% to 7.5%. We sold a site in Peru in June 2010, generating a pre-tax result of CLP6,670 million or CLP3,705 million after taxes, which is shown as a non-recurring operating profit.

The operating results increased 73.3% and, if the referred non-recurring item is excluded, it grew 30.3%. EBITDA increased 45.8% and the EBITDA margin improved from 19.4% to 25%. Before non-recurring items, the EBITDA grew 24.3% and the EBITDA margin increased from 19.4% to 21.3%.

The second quarter net profits decreased 39% due to the absence of two non-recurring items that generated extraordinary profits in 2009. This is, one, the sale of 29.9% of the water business to Nestle for a net profit of CLP19,920 million and, two, the deflation effect on our US indexed financial debt, which generated a higher result after tax of approximately CLP2,000 million versus this quarter if the CPI variation last year would have been the same as in the present quarter.

Factoring out these 2009 effects and the sale of the site in Peru in 2010, the pro forma net profit for the second quarter would have increased approximately by 42%. The Chilean beer segment has a high average price of 1.4% on higher volumes of 10.3%, resulting in an 11.7% increase in net sales.

The cost per hectoliter decreased mainly due to lower cost of raw material, both in dollar and in Chilean pesos due to the appreciation of the currency by 6.4% in Q2, decreasing the cost of goods sold from 46.8% to 41.6% as a percentage of revenues.

The operating results and the EBITDA grew 46.6% and 34.5%, respectively. The Argentine beer segment also performed well, with 3.2% higher volumes and 10.3% higher average prices in Chilean pesos. In [said] currency, net sales including higher intercompany sales to the Chilean beer division increased 16.9%.

Operating results increased 45.9% and EBITDA improved 28.6%. In US dollars, operating results and EBITDA grew 33.7% and 25.8%, respectively. The non-alcoholic beverage segment increased its net sales by 11.2%, mainly as a result of 9.9% higher volumes and 1.8% higher average prices.

The nectar category volume grew 18.3%, followed by soft drinks 10.5%, and water 1.2%. The operating results and EBITDA increased 44.6% and 26.4%, respectively. The wine business net sales increased 17.1% due to 24.8% increasing volumes, coupled with an almost flat average price in Chilean pesos.

The higher price in domestic wines is explained by an 8% price increase in late April. In order to compensate for the higher cost of bulk wine, between inventory losses in the earthquake and also because of the lower harvest yields this year. On the other hand, the decrease of exports priced in Chilean peso is explained by depreciation of the peso vis-a-vis the US dollar. As a consequence, the operating results increased 53.4% and EBITDA grew 19.8%.

The spirits business continues placing focus in the premium products contributing to the industry positive trend. By larger Pisco volumes, we have played a role by strengthening our premium brands with Mistral.

Net sales increased 18.2% due to a combination of higher sale of [excess] bulk wine and, more importantly, due to 10.7% higher gross products volume 1.5% higher average price. The operating results and EBITDA decreased 17.6% and 14.6%, respectively, due to higher margin expenses related to new products introduction.

With regard to the earthquake, we have recorded CLP19,949 million in accounts receivables, corresponding to the application of insurance policies covering the costs and expenses incurred as of June in relation with damage control tasks and destroyed inventory. We estimated that the amounts to be received from insurance companies in excess of the book value will adequately compensate the deductible amounts. Now, I will be glad to answer any questions you may have.

Thank you, sir. (Operator Instructions). And we have a question from Jose Yordan from Deutsche Bank. Please go ahead with your question.

Good morning, Patricio and everyone. A quick question, you obviously had some very good volumes in Chile in the second quarter and, then, can you give us any color as to how -- whether that's extending into the third quarter or not? You certainly have easier comparisons in many of the categories and so any color you can give us on that and, I guess, on Argentina, there's been a lot of press about the economy getting better, et cetera.

How -- do you feel that in your operations yet and how would it translate into improved volumes and performance over the, the next year or so given that it's been slowing down, let's say, over the last few quarters?

Thank you, Jose, and good morning. As you said, we are very glad with the volume we've got in Q2 2010 and, to be absolutely honest, at the beginning of the quarter, and just after the earthquake, we were not expecting such volumes to come. But, two things happened, and I think in a way they will maintain for the rest of the year. I'm not sure that it's in the same level than in the second quarter, but two effects are going to be there.

Number one, the unemployment rate is decreasing importantly in Chile, particularly in the construction sector where we have heavy consumers of some of our categories, particularly beer. This effect number one and effect number two is that we have been saving market share in some categories for some months and years, in other cases and this increasing market share is based on the construction of good [equity] value behind our brands.

This is the case of our non-alcoholic beverage system. This the case of Argentina. This the case of the wine business, in domestic side of business, and this the case of the spirit business. In the case of beer, we are keeping or losing a little bit of market share, but growing volume because of the first effect. Then the combination of these two effects, I think, that will allow us to grow volumes for the rest of the year and so, we expect that also for 2011. But again, it could happen. Who knows?

Yes. And, then, just on Argentina, in general, what are you seeing there?

Yes, now, in the case of Argentina, as I said before, we have been gaining market share on one hand and of the consumption patterns, not just in the beer business but in many other consumption categories are very positive and on one hand, and on the other hand, we have been increasing prices a little bit more than costs.

Then we are increasing our margins and the combination of better volumes and better margins, it's a very good generator of profits, and we expect to have good quarters in the rest of 2010. Argentina is a very volatile country, then to make projections for 2011, would be a little bit riskier, but we are positive regarding our operation in Argentina, as I'm explaining now.

Right. And I guess, the high labor costs have continued to be an issue in Argentina. Is that something that persists or you've just passed it on to prices and that's just going to remain the model for the foreseeable future of continued pressure in labor prices leading to this higher -- to being passed on to the consumer?

Yes, I mean the pressures in the labor side of the business are enormous and they don't stop and, of course, it's a concern that we have in Argentina. But we have been able to increase prices, structurally, on one side and by increasing the percentage of premium products or products with higher price on the average on the other.

And putting both things in the balance, we have been able to improve results and we expect it to happen in the next months. But, again, it's very difficult to make projections in Argentina because it's a very volatile market. But, we remain positive regarding the balance in price on one hand and labor costs on the other.

Okay, great, thanks a lot.

Thank you, Jose.

Thank you and the next question comes from Carlos Herrera from Santander. Please go ahead with your question.

Hi, good morning. I have a question about MSD&A in the Chilean beer division. We have seen in the last two quarters, that, as a percentage of sales, of net sales, they have decreased dramatically. Wouldn't it be profitable to increase marketing expenses in the following quarters, taking an advantage on volume rebound in Chile, so that this as the percentage of sales, MSD&A, would increase for the next quarters?

Thank you, Carlos, for your question. In fact, we have been increasing marketing [emphasis] in the beer business. In fact, the marketing rate was 9.1% in Q2 2010 compared with 7.3% in Q2 2009, then we increased the marketing rate by almost two points. And we expect to keep a good activity in marketing because I think that the rest of 2010 and 2011 are going to be good years in order to increase the [kind of] consumption of beer.

That's as I explained before, the unemployment rate, particularly in the construction area, has decreased importantly because of the earthquake and most of the people in the construction area are employed nowadays. And it is important to increase our marketing efforts in order to keep a high top of mind and first preference in the mind of this (inaudible). Then, this is my question, yes?

Thank you.

Thank you and the next question comes from Alan Alanis from JPMorgan. Please go ahead with your question.

Thank you. Can you hear me there?

Yes, yes, please, please, Alan, good morning and go ahead.

Sorry about that. My question has to do with working capital in the wine segment. We're seeing very, very nice -- congratulations for the growth in the wine business. We're also seeing expansion of margins and improved profitability of the wine business, even higher than we've seen with wine companies from other parts of the world.

So, I guess, the question is two, where do you think the wine margins can go going forward we think in a normalized way in the longer term, number one, and number two, what are the working capital needs in terms of, particularly, inventories to continue supporting that expansion in the wine business?

Thank you, Alan, for your questions. Look, first of all, regarding margins, our focus in the wine business, it's not -- we do not put the focus on margins, but we do -- but we put our focus on return on capital employed. With the capital employed, we have today in the wine business, enormous, it could see in our press release and our (inaudible), it's a little bit more than $300 million.

In fact, the capital employed that we have in the wine business in Chile is higher than the capital employed that we have in the beer business in Chile. And the operating results we get in the beer business are much higher than the operating results we get in the wine business. Consequently, the return on capital employed of the beer business is enormous and the return on capital employed on the wine business is around 7%, which is lower than our cost of capital, which is around 9%.

And our purpose is to increase the return on capital employed to the level of 11% or 12% in a three-year term. And this has relation with your question regarding working capital because working capital is part of the capital employed. Then the path to increase return on capital employed has two elements, number one to improve operating results and number two, to control the increase of the working capital and fixed costs after depreciation.

And we think that we are now in the right direction and -- to get the results I am presenting, 11% return on capital employed in a three-year period. But again this is just a projection and of course the figures are against our prediction because we have not been able to do this in the last 10 years. And we have been pursuing this step, (inaudible) but we have made some changes and some adjustments in our teams on one hand and in our strategies on the other hand. We feel positive now about our abilities.

That is extremely, extremely useful. So 11% to 12% return on invested capital as an aspiration for the next three years. Sounds --.

But again, Alan, we cannot commit this because it is the future, and we are not the owners of the future --.

Correct.

-- for one. And number two we have to be very honest that we have been pursuing this for the last many years and we have not been able to do this.

I understand.

We are very committed and we think that we have our strategies in order to get this.

Thank you. That's very useful and a very clear answer. Thank you so much.

Thank you and the next question is a follow-up question from Carlos Herrera from Santander. Please go ahead with your question.

I also have a question about the profits from joint ventures and associates. I have seen that in foods and Promarca in the second quarter we have a year-on-year growth of 100%. And that is the most profitable of the joint ventures. What is behind that 100% year-on-year growth in Promarca -- in foods and Promarca?

Also the same happened in Austral brewery. I would like to know what's behind that too. And in the case of BAESA Chile you have been constantly losing money there and my question is when do you expect it to be profitable? That's it.

Thank you, Carlos, for your question. Let's go first of all to Promarca; in the case of Promarca (technical difficulty) and 50% by CCU and 50% by Watt's sales. And Promarca has just one asset which is the Watt's brand. And then Promarca gives their Watt's brand in license to Watt's and to CCU, and in the case of one it's for the carton packaging, for the [fruiter part] packaging and in the case of (technical difficulty) plastic and glass bottles.

Then, Promarca almost passed (technical difficulty) but just received royalties from these two operations. And as the nectar business has been very good in CCU and particularly good in Watt's in the first half of the year, particularly in the second quarter of the year the results of Promarca also are growing.

But it is important to say that most of the profits of the Watt's brands are not allocated in Promarca which is just charging royalties for Watt's sales for CCU. We make a huge business in CCU by producing, selling and distributing the nectars. And part of this huge margin is paid to Promarca in the form of a royalty. So this is the case of Promarca.

In the case of both Austral and (inaudible), both those operations are rather small, and most of the total results (technical difficulty) company owns 50% by CCU which is the case of Promarca foods and (technical difficulty). Most of the results come from the Promarca -- from the Promarca results. In the case of soda, I have mentioned many times, soda for us is a learning experience in order to [keep] with the [basic] food products.

And I want this to develop enough capabilities in order to create in the long term, a ready to eat arrangement as strong as already the (technical difficulty) operation. And we are very happy with the result because we have more than doubled the volumes in the last five years in these operations and at the same time we have [decreased] by 66% or 70%, the full-time employees were (technical difficulty) there, and day after day were improving the joint distribution of [ready-to-eat and ready-to-pick].

In the case of Austral, something similar to Promarca happened because we distribute most of the volumes of Austral in Chile, with the exception of Punta Arenas where the Austral plant is installed and we captured an interesting margin in the distribution of Austral products, which are very high priced products.

In the case of BAESA Chile, this too, we have not made money there, but we are building an interesting operation of almost 2,000 cases at an average price of $47 or $50 per case, and it's a long-term project, which we expect to capture a 10% or 11% return on capital employed at the end of this decade. This is the answer to your question.

Thank you very much. Everything was very clear.

Yes.

Thank you. And we have a follow-up question from Jose Yordan from Deutsche Bank. Please go ahead with your question.

Hi, Patricio. Can you just give us an update on your sugar costs at the [acuza] level? What is the specific situation in Chile with sugar prices, with Iansa, et cetera? Will your average price be falling in the second half of the year or not? Just interested in how many months of inventories you had at the more expensive levels, et cetera and how that works through your results?

Yes. Thank you, Jose. I will ask Ricardo Reyes to give you details regarding our sugar contracts.

Hi, Jose. We, as you know, we are buying on an area of three months in advance and we have a certain number of inventories, so at the current prices, we have inventory until November this year. We are reducing, in this way, in some sorts, the volatility.

And we are open, in 2011, to the market price.

Yes.

But basically is your average price for the third and fourth quarter is going to be the same or lower than in the first half of the year?

That will be -- in terms of dollars, it will be the same. In terms of Chilean pesos, it depends on the currency because we are not taking the future cash flow.

Okay.

(technical difficulty) dollars.

Okay. Thanks.

(Operator Instructions). And we have a question from Melissa Byun from Bank of America-Merrill Lynch. Please go ahead with your question.

Hi. Thank you. Just as a follow-up to Jose's question, can you talk a little bit about the raw materials outlook for some of your other businesses? And what impact, if any, you expect from higher wheat prices? Thanks.

Thanks to Melissa for your question. It's a [two-fold], most important raw material for us is the malt and the barley because the beer business in Chile represents 49% of our EBITDA and the beer business in Argentina represents 10% or 11% or 12% of our EBITDA.

Then it's important to discuss about it. In the case of malt, we write contracts from March, April, May of one year to the same months of the following year. In fact, we have assured the price of malt until May 2011. It will depend on volumes. Because if volumes are higher than expected, malt -- the malt is going to be finished in April and it will sell less than expected in June.

But average, and assuming that we make our budget, we have the price assured or fixed to May 2011. And it's a very attractive price of around $520 to $520 -- $520 to $530 per ton, which is an interesting price.

As you probably know and surely know, and this is the reason why you are making the question, the cost of barley has increased important in the last few weeks in the world, but this is not affecting us.

We are going to negotiate the new contracts in January, February, March 2011 and it will depend on what happens in those days. This is -- that day. So then because of the sugar that is -- which price is fixed to December, and because we have fixed the price of barley until May 2011, we feel rather comfortable on our ability to keep our costs and our margins under control in the second half of this year and the beginning of 2011.

Great. And then for the spirits business and wine, what are you expecting?

Yes, in the case of wine, for the price of wine has increased importantly in Chile, which affects mainly the domestic side of the business. And partially the export side of the business. Mainly domestic side of the business because in the domestic side of the business, 95% of the wine is bought from third parties. This is true for ourselves and for our competitors.

And in the export side of the business, 40% of the wine, roughly, 40% to 50%, it depends on the volumes, is bought from third parties. And because of (technical difficulty) the price of wine has increased. (Inaudible) the earthquake, because we lost a lot of inventories and number two because the harvest in 2010 was lower than average. Then there is a scarcity of wine and the price of wine is increasing importantly.

We increased prices by 8% in April, as I said in my introduction, and last week we announced we are going to increase prices by 8% again in the domestic side of the business. And we think that most of the market will move in the same direction. By doing this, we are offsetting the effect of the higher price of wine.

On the export side of the business, we are moving cases from low-priced exports to high-priced exports and by doing this, keeping our margins. Again, when you increase prices, you always have the questions of what is going to happen with volumes. If volumes decrease for this reason, it's going to be detrimental for us, but we expected them not to be reduced and confident about our ability to offset this. We think that this effect will last until the first half of 2011. And we expect to have lower cost of grapes and wines in June -- May, June, July 2011.

Great. Thank you very much.

Thank you. And the next question comes from Celso Sanchez from Citi. Please go ahead with your question.

Hi. Good morning. Just a follow-up to the comments you made on barley. Can we just clarify, the $520 to $530 through May of '11, does that also applied to Argentina barley needs or is it just Chile? And if it is just Chile, could you give us an idea of what Argentina's needs look like?

Thank you, Celso. It's both for Chile and Argentina. In fact, the price I gave to you is the price we have in Chile. In the case of Argentina, it's a little bit lower.

Okay. Great. Good to know. Thank you. Then just another follow-up, you talked about the ROCE expectations, kind of longer term, for wine or medium to longer term for wine. Can you talk a little bit more about the ready-to-eat food business? How you sort of see that evolving and what your ultimate goal would be for the ROCE value for that business?

Yes. As I said before, Celso, the business is small and the capital employed we have there is also small. Then our main focus, short term, is not in creating. We don't have capital employed, but in creating capabilities to operate [together], ready-to-eat and ready-to-drink.

Having said that, of course, we are focused on increasing our results and we expect to have a return on capital employed set to our costs of the (inaudible) a three-year period term.

Okay. Sorry. Just to make sure I heard you correctly, because the connection has been a little bit fuzzy. The -- obviously it's a small base now and you're still growing the business, but I -- but longer term, the idea is to at least cover the cost of capital, but when we think about the capital employed for the different parts of CCU, would -- is it a reasonable expectation to assume that a ready-to-eat food business, a successful one, can have a capital employed that's better than a wine business? Is that a fair assumption? Or is that (multiple speakers)?

Yes, it's a fair assumption because this is 100% domestic.

Yes.

And in the case of the wine business, most of the capital employed is represented by the export side of business. So it's very difficult to build brands. It's very difficult to capture good distribution and distributors usually capture most of your margin, which is the main challenge in the export side of the business.

The domestic side of the business is -- the domestic side of the wine business is much more profitable than the export side, on average basis, and we expect the same for the ready-to-eat business, definitely.

Okay. Thank you.

Thank you.

We do not appear to have any further questions. Please continue with any points you wish to raise.

Yes. Okay. Having left the global financial crisis behind, at least we hope, so I'm confident that the 2010 earthquake consequence will soon be in the past to expectantly in a very good standing to continue growing organically, but also prepared to address the non-organic growing challenge we have (technical difficulty). Thank you very much.

Ladies and gentlemen, this concludes CCU's Second Quarter Results Conference Call. Thank you for your participation and you may now disconnect.