Compania Cervecerias Unidas SA (CCU) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to CCU's Third Quarter Results Conference Call on the 5th November 2010. 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 will now hand the conference over to Ricardo Reyes. Please go ahead sir.

Thank you very much. Good morning and thank you for attending CCU's Third Quarter 2010 Conference Call. I am here on behalf of Patricio Jottar, CCU's CFO, who excuse himself this morning, Rosita Covarrubias, IR Manager, and Carolina Burgos, IR Analyst. You have received a copy of the Company's result for the third quarter of 2010. On this occasion, I would like to comment on the result of each business segment and also address some new developments during the quarter.

After this remark, I would gladly answer any question you may have. We are pleased with the CCU's Third Quarter 2010 volumes. The total volumes sold increased 8.7%, and the average price was 2.3% higher, costing revenues to grow 11.3% above the 2009 third quarter figures. Almost all our segment increased their volumes, non alcoholic with 13.2%, Beer Argentina with 7.9%, the Spirit with 7.4% and Beer Chile with 6.8%.

Within the wine segment, the domestic volume increased 6.3%, whereas the exports from Chile and Wine Argentina decreased 3.4% and 26.2% respectively. With regard to prices, we'll raise them in Beer Chile, 6% for premium and one way package on August 1st, and in wine 6% for domestic wine in August and 3% on average for export throughout the quarter.

Although the full effect is yet to be seen because of very challenging competition and foreign exchange condition, that is the Chilean peso appreciation immediate adverse effect on our export sale. The cost of goods sold increased 11.9% and as a percentage of net sales, they increased slightly from 48.3% to 48.6%. Such change is mostly explained by the higher cost of wine raw material which was not fully compensated by the positive effect of the Chilean peso appreciation vis-a-vis foreign currencies on the dollar indexes raw material mainly in the other segment.

The full effect of the peso appreciation on the dollar index of raw material cost has not yet been fully evidenced because of the time lag between the moment of acquisition and the depletion of the same. As a consequence, the gross margin decreases slightly from 51.7% to 51.4%. MSD&A expenses as a percentage of net sales remained almost flat, varying from 36.3% in 2009 to 36.2% in 2010 despite higher marketing expenses, mainly with regard to the bicentennial activities and to the final round of the Soccer World Cup.

The operating result increased 9.7%. EBITDA increased 7.9%, and EBITDA margins decreased slightly from 21.6% to 21%, explained by the currency valuation in line positive effect on raw material cost, but yet immediate negative impact in net for sales, and by the higher marketing rate.

Bottom line, the third quarter net profit increased 8.9% to CLP19,569 million. When analyzing the result by segment, we can comment that the Chilean Beer segment had a higher average price of 2.3%, and high volume of 6.8% resulting in an 8.1% increase in net sales. Cost of goods sold, as a percentage of net sales, remained almost flat, changing from 40.9% to 41%, not revealing yet in full the positive effect of the Chilean peso appreciation in the cost. Operating results and EBITDA grew 7.1% and 3.9% respectively.

The Argentine Beer segment also performed well with 7.9% higher volumes and 12.4% higher average prices in Chilean peso. In such currency, net sales increased 20.8%, cost of goods sold as a percentage of net sales, decreased from 48% in 2009 to 46.9% this year. Operating result increased 2.3% and EBITDA improved 6.8%. In US dollar, operating result and EBITDA grew 29.6% and 17.6% respectively.

The non-alcoholic beverage segment increased its net sales by 14.4% mainly as a result of 13.2% higher volumes and 1.2% higher average prices. The net [of] category volume grew 20.3% followed by water, 15.2% and soft drink 11.1%. Cost of goods sold as a percentage of net sales, decreased from 50.8% in 2009 to 49.9% this year. The operating result and EBITDA increase, 71.8% and 43.6% respectively. The outstanding result is mostly due to significant volume increase coupled with higher average prices.

The wine business net sales increased 1.9% due to 3.8% increase in average prices in Chilean pesos, coupled with almost flat volumes minus 0.7%. The 17.3% higher prices in domestic wine is explained by an 8% price increase in late April, and an additional 6% rise in August this year in order to compensate for the higher cost of raw material wine due to inventory losses in the earthquake, and also because of the lower harvest yield this year.

On the other hand, the decrease of actual prices in Chilean peso is explained by the appreciation of the peso beyond the 3% price increase in foreign currency. The operating result and EBITDA decreased 25.7% and 18.1% respectively. As a consequence, mostly of the higher cost in raw material are foreign currency depreciation, vis-a-vis the Chilean peso.

The Spirit business, net sales increased 16.5% due to 7.4% increase in volume and 2% higher average price. Cost of goods sold as a percentage of net sales, decreased from 53.4% in 2009 to 52.7% in 2010. The operating result and EBITDA increased 24.9% and 19.2% respectively as compared with the same period last year.

With regard to the earthquake, we have recorded CLP23.3 billion in account receivable, corresponding to the application of the insurance policy covering the cost and expenses incurred as of September in relation with damage control task and destroyed inventory. On the other hand, we have received partial cash advances from the insurance company amounting to CLP19.6 billion, as of the same date, and CLP2.2 billion in October for a total of CLP21.8 billion.

We estimate that the amount to be received from the insurance company until the final settlement in excess of the book value will adequately compensate the deductible amount. Now, I will be glad to answer any question you may have.

Thank you sir. (Operator Instructions). The first question today comes from Alan Alanis of JPMorgan. Please go ahead with your question.

Yes, thank you, good day everyone. I have a couple of questions, and first one regarding Argentina. It seems that you made some gains of market shares in Argentina without having to discount -- if I compare numbers of AmBev, probably you grew 8%, your volumes, they grew around 5%. There were some market share gains with pretty very healthy pricing, so if you could comment we should be expecting that to go on.

And related to that however is that we're seeing a contraction in margin, in the EBITDA margin in Argentina, and apparently it's because of -- apparently it's because of increases in the SG&A. If you can explain what that SG&A is, that would be my first question please.

Thank you Alan. Yes, well, we have increased slightly our market share in Argentina. We have increased also slightly over the market, our prices in Argentina, reposition our brand, and we are very happy because of that, but we think that the current market share is stable long term.

Yes.

So, we don't perceive that we are going to continue gaining market share in the future, probably it will remain at the level it is now.

Okay.

Regarding the decline in the EBITDA margin, this is mainly because of the cost pressure that Argentina is suffering, mainly salaries, distribution costs et cetera. They have been beyond our price increases in pesos Argentina. So, there is something to be done in the future.

Okay, thank you, that's useful. Now, my -- another quick follow-up would be regarding wine in Chile. We saw there a very significant increase in cost of goods sold, but also on the SG&A line. So, what should we -- what explaining the SG&A increase in the wine division, and what should we expect going forward in terms of both your cost of goods sold and your expenses there?

Yes. Well, regarding cost of goods sold, this will remain at the level where it is now for the next coming month, because the higher cost of inventory of the -- this harvest price of massive wine increased significantly because of the lower harvest and because of the loss of inventory, and this will remain until mid next year, the level.

Regarding the SG&A, we have some specific cost during the quarter related with overtime due to some production inconvenient we have with our equipment that were not on maintenance during the previous months because of the excess of demand we suffer --

Yes.

-- due to the earthquake. And also some additional costs related with the layoff of -- as a result of the merge with Vina Tarapaca, that we are still in this process.

Looking forward, we see that cost will -- our SG&A will be something that we are going to work on in order to remain competitive at this current exchange rate level, and that is the main task that the winery has in term of this on full of their control, as to adequate their cost to the current exchange rate level.

Yes, so, if I'm understanding correctly, basically what we should expect going forward is maybe we'll see some declines in SG&A, because this quarter includes some one-offs or non-recurrent events, however you continue to expect some high pressure on the cost of goods sold.

So, if the Chilean peso remains strong, there's not that much space for further price increases in the wine business besides the ones you passed in August for the domestic market, and specifically for the export market. So, I guess bottom line is it's going to be hard to see a margin expansion in the next few quarters on wine. Correct, Ricardo?

Yes, you're right.

Okay. That's very useful, thank you so much.

Welcome.

The next question comes from Melissa Byun of Bank of America. Please go ahead with your question.

Thank you. I had three questions on the Chilean Beer operations. I was wondering if you could provide some color on the pricing environment in the third quarter and the fourth quarter to date. In the press release you mentioned having to offset a portion of the price increase with promotions. So, that would be the first question.

Okay. Well, we increased prices at the beginning of August, so -- and this price increase was up 6%. It was an important price increase for all the premium brand and for all the one way package. Most of our -- the activity of our competitors have in supermarket in one way package, so they did or they had a big discount versus our brand and we increased this gap after the price increase.

So, for some weeks, we have promotion, during September were the holidays, the bicentennial activities, so we need to be competitive, so we have some promotion for cans, especially with Cristal. And but in October, we updated again our used discount day to day prices to the former levels. Right now, we think that we're going to maintain prices as it is at this moment without any price increase, any further price increase for at least the next 12 months.

Okay. And this is specifically in the premium brands and one ways or are there opportunities in the mainstream brands for returnable packaging?

No, no, returnable packaging, mainstream brand, we're not going to increase.

Okay. And then also -- and I apologize, I missed the beginning of your prepared remarks, so again I apologize if you did address any of these questions earlier, but can you also provide some color on the performance of Cristal, the new imaging and perhaps talk about some of the recent innovation that you've introduced to the market?

Okay, Cristal has stopped their decline in the market share after the new image was launching a year ago. And has increased also the first preference, and it has been very well perceived by the consumer, the new image.

Okay. And have you introduced any other new packages or products that might be worthwhile mentioning?

No, no, in this period we have not done any introduction.

Okay. And then my last question is just on the marketing investment and what we should expect for the fourth quarter and the third quarter, what was the year-on-year increase in Chilean Beer again?

Yes, in the third quarter, there was an increase in the marketing rate of 0.5 points, and this is on average in all the business segment, and this increase was mainly in beer in Chile, because of the World Cup during July, the finals round in South Africa, and because of the bicentennial activities, the festivity in September. Looking forward, we think that we're going to remain relatively flat or return to the more normal level.

Okay great, thank you very much.

Thank you.

The next question comes from Jose Yordan of Deutsche Bank. Please go ahead with your question.

Good morning Ricardo. When I was visiting with you guys in August, it had been a very cold August, right, and then that partly explains for the fact that beer volume growth was trailing behind what happened in the second quarter despite having a very easy comparison in the third quarter of '09.

Yes.

However, that was -- the other side of that coin was seen on the wine business up until July and August, but if you didn't give me any numbers, but it seemed to indicate that things -- that volumes were growing even better than during the first half of the year, which of course was in the 20% range.

So, what happened with volumes in the third quarter, and I guess in September must have been a pretty bad number to average out sort of flat-ish for the third quarter. And I guess any color you can give us on that and whether that was a one time impact or not? So, I guess what happened in September, and then what's your outlook for beer growth and wine growth in the fourth quarter?

Okay. Well, in case of -- after your visit we have a very good September in term of weather. It was warmer than the previous year, so it was not the case with July and August. So, that helped beer -- beer sales and non-alcoholic sales products, but affect in some way wine.

But the main effect in the case of wine is that we increased prices in August in the domestic market, and the rest of the industry had delayed any price adjustment, that we think in our case was necessary because of the higher cost of raw material.

So, still now, we have a -- we increased the gap to our competitors. We think that sooner or later this gap will be closed because of the higher cost of massive wine is affecting all of us. So, at the end, with the price of especially Gato, which is the main massive wine we have, will be competitive at the end.

Now is a little -- with a little higher gap versus other brands, and this will -- this effect of September will continue during October, because there has not yet any price movement of our competitors.

Okay. So, more of the same for the fourth quarter, but then back to normal next year, and I guess in the case of Beer Chile, also a relatively easy comparison for the fourth quarter, so is it still fair to assume growth in the mid to high single digits for the fourth quarter and for 2011?

Yes, well, we won't like to do projections, especially in months that are very significantly -- like November and December, but of course, we think that all this -- the force are there, lower unemployment and additional demand because of that. So, we expect to have a good fourth quarter.

Great. And if I can ask one last question, can you update us or remind us what your CapEx budgets are for -- how you expect to end 2010 and what your budget is for 2011? There have been significantly higher levels these two years, and I just wanted to see what the latest numbers were there, if you can share those.

Jose, Hello?

Hi.

This is Rosita, how are you?

Good.

Jose, look, the only public information we have with regards to how the future is going to be for CapEx is on the 20-F. That hasn't changed. We don't have any updated information to release, okay? And if I'm not mistaken, in that document we spoke about having US$110 million investment for this year, 2010.

And a bigger investment in 2011.

In 2011. But shortly, I will have to work -- start working again in the 20-F for year 2010 and I will have everybody in the Company putting numbers together release the new updated information.

But we don't have the number right now in front of us.

Right now I don't have it in front of me, but I remember it was US$110 million more or less, and a little above that for 2011.

I think what -- well, 2010 is we increased our CapEx during 2010, and in 2011 we are going to increase a little more, expanding especially our distribution in Chile, our distribution in Chile, but for 2012 and 2013, we'll be more closer to our depreciation. Now, it is far higher than our depreciation.

Okay, great. Thanks a lot.

Thank you.

The next question comes from [Andrei Sava] of Credit Suisse. Please go ahead with your question.

Hello, thanks for taking my questions, and I have two of them. Firstly, could you please shed more light on why your volumes are growing that much in Chile? Do you think you're taking some market share from Andina or are you growing in the different regions?

Well --

In soft drinks, I'm sorry.

Yes, I understand Andrei. The -- if you look long term numbers, and full of the non-alcoholic products, we have been gaining market share, not only against Coke owners, but also against the other player -- other players. And this trend continued during the quarter.

Alright.

It is because a lower per capita in that category, (inaudible) waters and energy drinks and sport beverage, and the strong brand we have in that category.

Alright. And with this strong volumes you are getting in the non alcoholic beverages segment, I guess we will continue to see strong operating leverage going forward. What is the long term EBITDA margin you expect for this business, and maybe the long term ROCE for the business?

Yes. We don't give this kind of projection Andrei, but we think that we are going to continue improving our EBITDA margin in non alcoholic business segment as (technical difficulty) been in the last years, for instance in -- look only the third quarter EBITDA margins, in 2007 we had 13.7% EBITDA margins, and we increased to more than 17% this quarter, have been increasing consistently year-on-year.

Okay.

And this business you either has a very strong return on capital employed because it's not intensive on -- less intensive in capital.

Alright. And just -- so, just finally, could you talk about -- a bit more about your pricing expectations for 2011 for this other segment, the non-alcoholic beverages? Thank you.

Yes, because of cost pressure, we are suffering with sugar, sugar cost. We are planning to do a price -- we are in the process to do a price increase during November, but for now we're at 2.7%, and so far the price increase, at least for the next four to six months after that.

Perfect, thanks.

You're welcome.

The next question comes from Jorge Opaso from LarrainVial. Please go ahead with your question.

Hello everyone. Well, my question is quite similar to last question, it's regarding Ecusa, it's regarding -- well you have shown, as you told, Ricardo, operating growth and EBITDA growth at very high levels in last quarters and last years. And I want to know your main operating initiatives and what you are doing there.

I know you have the Punto Maximo plan and very good operation -- operating initiatives there, but what is explaining this significant growth besides volumes? Obviously volumes at 10%, 11% explain much of this, but I don't know if you can disclose a little bit more, were they your main initiatives there in that segment. Thank you.

Yes, this is -- well, the resulting volume is mainly because of the strong demand after a year of recession, and their affect in general not only in non-alcoholic, but also the other category. Also, as I mentioned we have gained a little market share, and we have gained this market share because of the strong distribution we have, we are getting advantage on that in term to have a closer and better relation with our clients and a better execution in the point of sale, and on the cost side, a very tough control of cost in the non-alcoholic business unit.

Okay.

So, of all this factor has created this momentum of growth with the results.

Okay. And then how are you seeing demand in fourth quarter and also in the -- regarding the beer segment, about the price increase that you have made in August? I don't know if -- how you're seeing demand in that segment, has it been slightly affected or not in the premium or one way of the beer?

Yes. Of course there is an effect, especially with regard with your competitors. Main effect is in the supermarket channel, that we were (inaudible) for us about a quarter of the total of our sales. And volumes during October, we are not as strong as was the case -- here was not as strong as was the case for non-alcoholic products. We hope that the gap will be closed sooner or later, and we're going to grow strongly in the coming quarters.

Okay, thank you.

Welcome.

The next question comes from Luis Miranda of Santander. Please go ahead with your question.

Hi Ricardo, my questions have been answered, just a qualification. When you mentioned on the price, the outlook for price increases in beer for the next 12 months, you don't expect increases across all the beer subcategories or only on the returnable? Thank you.

Yes, hi Luis. Yes, we are not scaling any significant price increase or any price increase at all for the next 12 months, not only for one way package, but also for returnable package.

Thank you Ricardo, and gracias.

Welcome.

The next question comes from Cyndi Mosquera of BICE. Please go ahead with your question.

Yes hi good morning everyone. In the first place I want to congratulate you for the great results, and at the same time I have a question that's about like the salary cost, [where] like the sales and distribution personnel in Argentina. Is there something that you're planning to do in order to increase the control over the salary cost, because they have been impacting negatively the margins in Argentina for quite a few quarters?

Yes, thank you Cyndi. Related with Argentina, there are two effects. One is the cost pressure because of the inflation that affect in general the economy and affect in general the industry, because negotiation, union negotiation are across industry, so affect ourselves and our competitors at the same time, and also there is an additional effect that is related with the higher distribution we're implementing, covering our Argentinean cities with our own distribution.

So, these two effects, the first one is the only things we can do to remain very efficient, and do the investment to replace labor force by technology. And in the second, this is a very good project, because we create for us the possibility to expand to other business categories with other beverage in Argentina.

So, nevertheless, we have a negative impact of big -- higher cost because of a larger distribution on our own, but we have also better prices because of this in the beer category and also for the future we have been in the distribution to expand to other beverage.

Okay. But is there like some kind of estimate that when will this like direct distribution from CCU in Argentina will be reflected in better margins in that country?

Yes. The larger distribution in Argentina for this year, we are expecting to reach about 45% of direct distribution there versus 34% that we have last year.

Okay.

We are continuing this process.

Okay, thank you very much.

Welcome.

The next question comes from Antonio Gonzalez of Credit Suisse. Please go ahead with your question.

Hi, good morning Ricardo and Rosita.

Good morning Antonio.

Just wanted to see if you can give us an update on your growth opportunities in other categories and in other -- potentially other countries, and first if there is any update on that. And secondly, if you can remind us of -- if your target return for any of those expansion opportunities that you're looking for, that can give us a better idea of what could be your most preferred growth opportunities among the large number of options you've mentioned recently?

Hi Antonio. Regarding future non-organic sources of growth, we have mentioned in our presentation, there are four main projects. One is -- two of them are in Chile and two of them out of Chile. In Chile is to expand our snacks business or our ready to eat business. Currently we have about 5% market share overall as a mix in the several -- with the several plan we are participating there, and we would like to expand this in the next 10 years to 20%.

But there is no any other news that we could comment on. And the other project in Chile is the interest to the dairy business, which we think is interesting for CCU. The per capita consumption of milk in Chile is very, very low. It's mainly with long life milk in tetra pack container, which did very well with double distribution. And for the rest of the distribution, the product we need a different distribution system, because required a fridge. And also there is no other [progress] that we could comment on.

Now, regarding project out of Chile, we are talking about expand in Argentina to other beverage, and replicate the model we have in Chile, a multi-beverage company in Argentina, and enter in a third Latin American country. And of course I couldn't comment on any progress on that.

And related to the target return, what I could say is that of course we're looking very carefully at the impact that this is going to create value for CCU, so the return will be much higher than the cost of capital. And what we are looking for is that for the next -- for the next 10 years, have about 50% or a little less than 50% of the EBITDA growth will come from this expected acquisition or expected entrance in new business.

Thanks, that's very useful. And just on the dairy business that you mentioned, Ricardo, you mentioned that you're interested in the UHT segment only?

No, no, not only in that, not only in that. We are interesting in the whole -- whole business, so include the [new] foods and other cheese et cetera.

Okay, great. And even if you cannot leverage on your distribution network, that will be something that you might be looking for.

Yes, yes, yes.

Okay, thank you, that's very useful.

(Operator Instructions). We have a follow up question from Alan Alanis of JPMorgan. Please go ahead with your question.

Thank you for taking my follow-up. It has to do regarding -- I just want to validate some numbers here. I estimate that between 40% and 45% of your beer in Chile is non-returnable super premium. Is that the case approximately?

40% to 45%?

Yes.

No (inaudible), no, no, it's much lower than that.

Okay.

Yes, it's in the range of 12% to 15%.

12% to 15%? Because your 20-F says that your non-returnable beer as a percentage of total is 37%, so I was adding there another five point to super premium.

Yes, the main brand that are in non-returnable are the mainstream brand Cristal and Escudo.

Yes.

So, the super premium includes price per brand that are prices at 50% premium versus Cristal and Escudo and like Heineken or (inaudible) or Austral.

Yes, so, if you could repeat Ricardo, what's roughly the percentage of non-returnable, and then super premium as a percentage total?

Yes, in super premium it's about 12% to 15% --

Yes, okay.

-- of our mix, and there in the super business category, mostly it's a one way package. There is little volume of returnable package.

I understand. Where my question is coming from is, the increase of 6% that you did, was only in this 12% to 15% of your mix then?

No, but because include also -- well, it affect all the packaging in the super premium --

Yes.

-- mainly one way bottle and can, but also returnable bottles in the super premium. All this were increased 6%, and in the mainstream --

Yes.

-- affect all the one way package. So, cans and one way bottles were increase also 6% in the main (inaudible).

So, the 6% was roughly in what percentage of your business?

6% was -- no, no, it was more than that, because one way -- yes, 6.45% -- it's about roughly the effect when it's translated full to consumer, without any discount, it should be 2.7%, 2.9% price increase.

Got it.

On total volume.

On the total -- on the total of our sales.

Yes. Now, that's very clear, understood. The 2.7% is the net effect on the total. Now, last, last question. What's the logic or what's the rationale of doing this price increase precisely in the one way packages in the super premium? And let me tell you where my question is coming from.

We saw last year AmBev in Brazil doing exactly the opposite in terms of increasing more their -- well, on their super -- let me stop there. What is the logic of doing this price increase with this presentation and with this part of the category or the portfolio specifically versus the overall portfolio, Ricardo?

Yes. What we tried to do is to try to maintain the same unit margins independently on the package.

Okay.

And what happened is that because of some lag in the past to adjust or more competition maybe in the past, in the one way package, the unit margin of cans and one way bottles was lower than the unit margins in returnable. So, we'll like to have the same unit margins in both package, and let decide to the consumer which is their preference.

Understood, that's very -- that's crystal clear. Thank you so much for taking my follow-up, thanks.

Welcome.

(Operator Instructions). Thank you sir. We have no further questions.

Thank you very much. We are optimistic with regard to the 2010 final result for two reasons. First, year to date operating result is 19% up or 12% before non-recurring items, despite the fact that our core business was affected and we need to remember that, by the earthquake at the beginning of the year, and operating at a minimal level for one month during the month of March.

And second, the reconstruction work so far have been only focused on solving the emergency situation, providing basic emergency houses for thousands of families and bring children rapidly back to school. However, the bulk of the reconstruction program will soon start and will last for at least a couple of years.

We can be confident that these works, in addition to the private development, will be an important driver for GDP growth and the subsequent consumer demand increase. CCU is very good standing to couple with the expected growth, and also prepared to address the non organic growth challenges we have for the next 10 years for instance. Thank you all for attending our conference call, and I hope to see you soon.

Ladies and gentlemen, this concludes CCU's Third Quarter Results Conference Call. Thank you for participating. You may now disconnect.