Compania Cervecerias Unidas SA (CCU) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the CCU's Fourth 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). This conference was recorded Friday, February 4th of 2011. I'll pass over to Patricio Jottar, CEO. Please go ahead.

Good morning. And thank you for attending CCU's Fourth Quarter 2010 Conference Call. I'm here with Ricardo Reyes, CFO, Rosita Covarrubias, IR Manager and Carolina Burgos, IR Analyst.

You have received a copy of the Company's results for the fourth 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 these remarks, I will gladly answer any questions you may have.

We are pleased with CCU's fourth quarter 2010 performance. The total volume sold increased 4.5%. And the average price was 3.4% higher, causing revenues to grow 8.3% above the 2009 fourth quarter figures. Despite the month of December with a lower-than-normal temperature, almost all our segments increased their volume, non-alcoholic with 7.4%, Beer Argentina with 6.5%, spirits with 5.9%, and Beer Chile with 1.6%. The wine segment volume was 6% lower than in Q4 2009.

With regards to prices, they are higher in all segments because of price list rises combined with changes in mix. The cost of goods sold increased 7.8% as a percentage of net sales. They decreased slightly from 44.5% to 44.3%. As a consequence, the gross margin increased slightly from 55.5% to 55.7%.

MSD&A expenses as a percentage of net sales decreased from 36.6% in 2009 to 35.9% in 2010. The operating result increased 15%. And EBITDA grew 13.2%. Including other operating income and expenses, the operating margin increased 19.1% to -- from 19.1% to 20.3%. EBITDA margin increased one percentage point from 24.2% to 25.2%. Bottom line, the fourth quarter net profit increased 12.5% to CLP36,845 million.

When analyzing the results by segment, we can comment that the Chilean beer segment had a higher average price of 3.8% and a higher volume of 1.6%, resulting in 4.9% increase in net sales. Cost of goods sold as a percentage of net sales increased, changing from 37% to 38%. Operating results and EBITDA grew 13.2% and 15.1%, respectively. The operating margin increased 2.5 percentage points to 33.5%. And the EBITDA margin grew from 35.6% to 39.1%.

The Argentine beer segment also performed well with a higher average price in Chilean pesos of 10.2% and a higher volume of 6.5%. In such currency, net sales increased 17%. Cost of goods sold as a percentage of net sales decreased from 43% in 2009 to 39.6% in 2010. Operating results increased 55.8%. And EBITDA improved 48.4%. The operating margin increased 4.4 percentage points to 17.6%. And the EBITDA margin grew from 15.8% to 20.1% this year. In US dollars, operating result and EBITDA grew 6.4% and 60.2%, respectively.

The non-alcoholic beverage segment increased net sales by 12%, mainly as the result of 3.1% higher average prices and 7.4% higher volumes. The nectar category volumes grew 28.2%, followed by soft drinks 7.1%, and water 2.2%. Cost of goods sold as a percentage of net sales remained practically flat. The operating results and EBITDA decreased 3.6% and 2.3%, respectively, mostly because of marketing and distribution expenses increased. The operating margins decreased 2.3 percentage points to 14.1%. And the EBITDA margin decreased from 20.7% to 18%.

The wine business net sales decreased 2.4% due to the fact that the 4% increase in average price in Chilean pesos didn't compensate in full the 6% lower volume. The 29.7% higher price in domestic wine is explained by price increases in order to compensate for the higher cost of raw material wine and by the mix enhancement with higher concentration of bottle products.

The exports price decrease in Chilean pesos is explained by the appreciation of the peso. Cost of goods sold as a percentage of net sales increased from 62.2% to 66.3%. The operating result and EBITDA decreased 65.1% and 39.5%, respectively. The operating margins decreased 5.2 percentage points to 2.9%. And the EBITDA margin decreased from 12.9% to 8%.

Finally, the spirit business net sales increased 7.4% due to 1.6% higher average prices and 5.9% increase in volumes. Cost of goods sold as a percentage of net sales decreased from 55.6% to 53%. The operating result and EBITDA increased 6.7% and 0.3%, respectively. The operating margin remained almost flat in 13.7%. And the EBITDA margin decreased from 18.5% to 17.3%.

With regards to the earthquake and insurances, on one hand, we have CLP27.2 billion in accounts receivable corresponding to the applications insurance policies covering the costs and expenses incurred in relation with damage control tasks and destroyed inventory.

One the other hand, as of December 2010, we had received partial cash advances from the insurance company amounting CLP21.7 billion. We estimated the amount to be received from the insurance companies until the final settlement in excess of the book value will more than compensate the deductible amount. We expect to reach the final settlement soon as we reflect the results in the reporting of the first quarter 2011. Now I will be glad to answer any questions you may have.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Antonio Gonzalez with Credit Suisse. Please go ahead.

Hi, good morning, everyone. I wanted to ask you about the beer business in Chile. I saw the market share figures that you disclosed in your press release. And I wanted to see if you could give us some more color on why do you think these market share losses are taking place last quarter? And you talked to us a little bit about the price increases that you were implementing in the super premium and the one-way packages.

And I wanted to understand how did you balance these price increases that have been taking place recently with the market share losses? Is there -- how do you look at it going forward? Is there some issue about probably raising prices has been more difficult than you originally thought? And how can you maintain a market share closer to the 86%, 87% level that we saw over the last [three] years? Thanks.

Thank you for your question. First of all, I have to say that we do not have official information on market share in our industry. Some years ago, our main competitors used to make public release of their volumes in Chile. But they don't do this nowadays.

Then we made some estimations coming from news and information. But news then is not an accurate source of information for market share in the beer industry because the news can overestimate supermarkets, where our market share is lower than average, and underestimate the volumes of the traditional segment, where our market share is higher than average.

Then we have a methodology. And we transform news figures starting some internal information into market share. Then the fact that we lost 2.5%, again, is not a mathematical calculation on real volumes of the industry. But it's our estimation. This is number one.

Number two, the main reason of this decrease in market share -- but previous in 2009, our market share was 85.3%. It was not 86% or 87%. And we decreased 2.5 points compared with 85.3%. The main reason was the earthquake because after the earthquake on February 27, for a month and a half or for two months, we were not able to cope with all the demands of our beers.

Then most of our consumers have a chance to try other beers, particularly Corona, which is an imported beer, has been very successful because they didn't have problems with their production capacity because they produced in Mexico. And they gain, I would say, most of the market share we lost in the period. I would say that more than 50%, probably 60% of the market share, we lost is against Corona.

And the other 40% is against, our estimation is against InBev. It has the relation mainly with the fact that it has been much -- very aggressive in prices in one-way segments. And as you said in your question, we increased balance price in one-way segment than in premiums, which are mainly sold in supermarkets. In the second half of the year, we lost a little bit of market share because of this. This is the first part of my answer.

Regarding the future -- the last many years, we have been able to increase prices according inflation in most of our categories, according general inflation and in some cases according to specific inflation of raw material in other case. And we have been able to deal and to compete doing this for many years. And we expect 2011 not to be an exception regarding this.

Okay. Thanks. This is very helpful. So just as a follow-up, I understand that there's some degree of measurement error in terms of the market share figures. But going forward, you should come to somewhat higher levels as this earthquake effect gets back, right? I'm probably thinking about something closer to 86%, 85% market share in the next years. There's no reason to believe it shouldn't be achievable, right?

Yes, look, as you know, in order to make money in the beer business, we need a sound combination of per capita, number one, market share, number two, and margins, number three. And we are trying to combine these three elements. Of course, there are some minimums that we never allow our market share behind some minimum. We look for the balance in per capita, margins, and market share.

Then we reasonably expect not to lose more market share [definitely], eventually to increase market share, but we are going to put focus on per capita and margins because we want to protect the bottom line and EBITDA of the business. But I -- rather than giving you a precise answer in our expectation of market share, I prefer to say that we're still very comfortable on the combination of market share, margins, and per capita for the very long run in our beer business in Chile.

That's very useful. And the 6% price increase that you put, if I recall correctly in the third quarter of 2010, did it stick during the fourth quarter? Or did you have to effectively discount a portion of it in recent months, especially in one way after you mentioned that you paid aggressive prices in -- from your competitors in one way?

No, we are permanently doing promotional activities regarding prices in specific channels and specific moments. But in general terms, we're able to keep the price increase.

Okay. Perfect. Thank you very much for your comments. It was very useful.

Thank you.

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

Hello, everyone. My first question is regarding the -- it's like a follow-up of the last question regarding price increases in the Beer Chile division. And also, in [Akuza], if you can give us a little update of how you're seeing volumes during this year, if in January they are continuing -- they are affected or not by these price increases that you made in Akuza and in the Beer Chile division.

My second question is regarding the marketing expenses. We saw a drop of marketing expenses in the Beer Chile division as a percentage of revenues and increasing in Akuza, only a follow-up of what are you doing there and what can we expect if you are -- will continue with the same policy or what can we expect for this year? Thank you.

Thank you. Thank you, Jorge, for your question. Regarding the balance between prices and volumes for 2011, I would like to say that we feel comfortable. In fact, we expect probably to adjust prices in both categories again, particularly in soft drinks because the price of sugar has been a very high level. And the Chilean peso has not appreciated because of the intervention of the central bank. Then we need to make adjustments of prices during 2011. And we expect that the industry as a whole will move in the same direction.

And I would like to say that the fact of increase prices and keeping volumes growing at the same time is not new for CCU. Let's consider the case of beer in 2007, for example, which was a year of high inflation. Inflation was 7.8% if you remember in 2007. So we increased our volumes by 4.3%. And our prices 9.9% on real terms. This is 7.8% plus 1.9%. This is around 10%.

Then we are not afraid of our ability to keep prices on real terms in the different categories. And you have to consider also that most of the salaries in Chile are indexed by inflation. Then the ability to purchase power of our consumers is adjusted almost automatically by inflation. And then I don't feel afraid on this effect for 2011.

Regarding marketing rates, 2010 was a year of high market rates. If you remember in 2009, we cut marketing rates because of the recession. To get good results in 2010, we increased the marketing rates. And we expect 2011 to be a year with a roughly similar marketing rate than 2010, so probably a little bit lower in order to generate on economies of scale because we are growing volumes and revenues. This is what we expect for 2011.

Okay. Thank you. Very useful. Thank you.

Thank you. Thank you.

Thank you. Our next question comes from the line of Pedro Leduc with JPMorgan. Please go ahead.

Hi, good afternoon to all. Our question is not specific to the quarter but rather regarding your non-organic expansion plans exposed in your last corporate presentation. You've mentioned interest in the ready-to-eat market and dairy market in Chile. Could you please enlighten us what the criteria for potential acquisitions will be and what leverage -- what level of leverage you would be comfortable with? Thank you.

Thank you, Pedro, for your question. What we made public information was our vision for the next 10 year. And our vision for the next 10 years is that we have two main sources of growth for our EBITDA, organic growth on one hand and non-organic growth on the other. And in terms of organic growth, we have growth in per capita, the growth in shares, and the growth in margins through the premiumization of most of our categories. And we have a clear path -- a clear history on a clear path in the future regarding this.

In the non-organic area, we established different areas where we expect to grow in the non-organic area, which is mostly categories in Argentina, which is the milk business in Chile, which is a third country, and which is the consolidation and growth in the ready-to-eat category. But again, this is not our goals and objectives for our quarter but the transition for the -- this tradition for the future. And we are going to be open to all the alternatives which fit with this strategy. And of course, I cannot answer -- I cannot openly discuss the alternatives we're pursuing. I could only discuss what we have done.

There's the recent acquisition of the cider business in Argentina is related 100% with this. It's a very interesting acquisition. But it's almost or around 200,000 hectoliters of a cider business (inaudible) and it's more volumes in (inaudible) categories. It represents 23% of the industry in Argentina in terms of volumes of the cider industry and 28% in terms of revenues. It generates US$4 million in EBITDA. And we expect to generate very important synergies very soon in terms of cost, in terms of distribution. And we expect to enhance the margins and the volumes of the category.

You know perfectly that they do in many countries in Europe, cider is beginning to be a very trendy favorite among young adult consumers. And Argentina is a country which is very follower of the trends that coming from Europe. Then we expect to get very good results from that -- from this acquisition. And we are pursuing many different alternatives without of course -- without losing focus and without keeping our focus on the organic growth at any moment.

Okay. Okay. And regarding leverage levels, are you comfortable with current levels? And could you -- if you expect continue generating cash, you should be -- how do you feel with that?

Our leverage today is very low. Our net debt-to-EBITDA ratio is less than 0.4. It's 0.39.

(inaudible).

Yes, it's 0.39 on December 31, 2010, which is very low. We think that we reasonable could go to a level of net debt of two times EBITDA and being a very sound company. If we increase our debt from 0.39 or 0.4 to two, it's 1.6 times our EBITDA. It's around US$650 million or US$700 million, which is a lot of money. Then we have enough balance sheet in order to make acquisitions and to keep a sound balance on the other hand without calling for a capital increase.

For sure. No, that was very useful. Thank you. Thank you on behalf of Alan Alanis's team here at JPMorgan. Thank you.

Thank you.

Thank you. (Operator Instructions). Our next question is from the line of Jose Yordan with Deutsche Bank. Please go ahead.

Good morning, Patricio and everyone. I had a couple questions about your raw materials. The negotiations for your malt, if I recall correctly, you run out of your current contract in April or something like that. How is it looking for the next contract year in terms of a dollar price for malt? And then I guess the same thing with wine with the upcoming harvest in Chile, how's the cost of wine in Chile looking versus what the price was last year? If you could comment on that, that'd be great.

Thank you, Jose, for your questions. In fact, it is a very key question. And more than going specifically probably on malt and wine, let me give you an answer considering all the raw materials because we have pressures in most of our raw materials for 2011. Look, in December 2010, our Board approved our budget for 2011. Of course, I cannot make public the figures considering our 2011 budget. But obviously, it's an ambitious budget in terms of growing volumes and results in order to keep the growth that we have had in the last many years.

And if you consider the current and expected price for raw materials, malt, wine, sugar, cans for 2011, if you compares them with what we have in the budget approved in December 2010, we have higher cost in trillions pesos of around US$30 million. That's a lot of money.

And the reason of this is it has two reasons. Number one, prices in dollar terms are higher than we expected in two months to go. And number two, exchange rate is also higher because the exchange rate was CLP460. And the central bank made an intervention here. Then we expect today to have a higher -- a more depreciated Chilean peso. Then the combination is not a good combination because the market is only -- marketing is operating without noise in the raw material sector but it's operating with noise in the price of the dollar in Chile.

We have been working steadily during January in order to compensate this effect. And the good news is that we have been able to compensate more than 50%, around 60% of this US$30 million with efficiencies that changing into some positive and doing some adjustments in our business without considering additional price increases than we have in budget.

Of course, if at the end of the day the cost of raw materials is higher than expected, we'll have some inflation. And probably, the market will increase prices rather than originally expected. And if it is inflation, if we are able to increase prices more than expected, then we could have a very virtuous situation because we could compensate 100% of this effect to prices, which would be very good news. And at the same time, it would be keeping the 50% to 60% additional savings that we have been working during January.

Having said that, we continue working because our idea is to offset 100% of this effect through efficiency, which is not easy. But we are very committed to do this. And if we are able to do this, it's not going to be necessary to increase prices more than budget. But if we are able to increase prices and if the market conditions are possible to increase prices on top of budget, of course, we are going to do this. And we'll increase our results in a very important way.

This is our vision today. This is what we expect to happen. But of course, when you are dealing with the market, you never know if price increases will be possible. And you never know what's going to happen with volumes. Then I would say that we feel comfortable. But definitely the pressures in raw materials are not good news to begin in 2011.

Okay. Great. And if I could follow-up real quick, the recent entry of SAB into Argentina, what's your view on that? And what have you seen them do, if anything, since taking over that Isenbeck asset?

Yes, look, for CCU it would have been a good idea to buy Isenbeck. But we didn't do this because of anti-trust issues. Also, for InBev, it would have been a good idea to buy Isenbeck. But for them, it was not possible for the same reason than it was not possible for us.

And finally, as you mentioned, it was bought by SAB Miller. Short term or long term, look, short term, we expect no changes in their competitive ability and in the market because of this. Then I would say that 2011 is going to be the same with SAB Miller and with -- than it has been with Warsteiner. Long run, most of the analysts are writing in their beliefs that they expect InBev to merge SAB Miller. I don't know if it's going to happen or not. But if it happens, long run, it's not relevant.

Okay. Great. Thanks.

Thank you, Jose.

Thank you. (Operator Instructions). And I'm showing no further questions at this time. And I'm showing no further questions at this time. Do you have any closing remarks that you would like to say?

Yes, thank you. Reflecting on 2010, I would like to say that we are very satisfied having delivered these results. Having left behind a [tight] fiscal year, we're optimistic and looking forward [that] the basis for the growth we have disclosed during our three-year strategic plan.

We'll make the core business growth organically by taking every opportunity available in the market we participate today. And also, we'll seek non-organic opportunities in the beverage and food-related products in Chile and/or in the surrounding countries. Thank you, all, for attending our conference call. And I hope to see you soon.

Thank you, sir. Ladies and gentlemen, we thank you for your participation. And you may now disconnect.