Compania Cervecerias Unidas SA (CCU) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2011 Results Conference Call on the 6th of May, 2011. 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 Mr. Patricio Jottar, CEO of CCU. Please go ahead, sir.

Good morning and thank you for attending CCU's First Quarter 2011 Conference Call. I am here with Rosita Covarrubias, IR Manager and Carolina Burgos, IR Analyst. You have received a copy of the Company's results for the first quarter 2011. 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.

A year ago, our focus was placed primarily in the best way to overcome the difficult situation created by the earthquake that has hit our operations. As of today, we can announce that we reached a settlement with the insurance companies and we have received CLP39,549 million in cash, an additional CLP3,929 million in accounts receivable to collect. This compensation for the lost results 2010 has a positive non-recurring effect on our unconsolidated income statement, at the EBITDA levels at March 2011 of CLP12,683 million.

Leaving aside the non-recurring items, we are pleased with CCU's first quarter 2011 performance. The total volumes sold increased 6.1% and the average price was 6.9% higher, causing core revenues to grow 13.5% above the 2010 first quarter figures, for a 13.4% increase in net sales. Almost all our segments increased their volumes, here Chile, with 9.6%. Here Argentina was 6.9%. Spirits, with 6.6% and non-alcoholic beverages, with 3.7%. The wine segment volumes were 1.7% lower than Q1 2010.

With regards to prices, they are higher in all segments because of price-like-price combined with the changes in mix. The cost of goods sold increased 16.7% and as a percentage of net sales, they increased from 43.1% to 44.2% -- 44.4%, excuse me, due mostly to raw materials and energy and fuel cost increases. As a consequence, the gross margin decreased from 56.9% to 55.6% and SG&A expenses as a percentage of net sales decreased from 34.5% of 2010 to 34.1% in 2011.

EBIT before non-recurring items reached 11.2% and EBITDA before non-recurring items was 10.9%. The EBIT margin before non-recurring items decreased slightly from 22.4% to 22%. The EBITDA margin before non-recurring items decreased from 27.3% to 26.7%. Bottom line, the first quarter net profit before non-recurring items decreased 11.2% to CLP37,455 million.

However, the figures, all in, this is including non-recurring items, are as following. EBIT increased 37.7%, EBITDA increased 32.7% and net profits increased 35.2%. We are very satisfied with having delivered these results, with the settlement of the damaged claimed we can leave behind the 2010 earthquake episode because we recuperated the lost earnings in the first quarter of 2011.

Now we are really to face this year's challenges, which is, A, raw material, energy and fuel, higher prices. B, higher inflation rates and C, start-up volumes comparable to Q2 and Q3, due to the inventory recycling and the [fronting] consumption acceleration post-earthquake in 2010. This scenario led us to put in place a contingency plan consisting, at first, to generate costs and expenses savings throughout the organization. And second, to anticipate price increases, which were already planned for a later date in the year.

We expect to compensate a significant part of the negative aspect of the higher costs on our margins, although there is uncertainty about the outcome since it will depend, finally, on the market forces. We are concerned about the reverse scenario, but we will not lose sight of the growing target's perspective. We'll also pursue, energetically, our goals. Now, I will start to answer any questions you may have.

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

Thank you so much. Hi, Patricio, Carolina, Rosita. I have a couple of questions. The first one has to do with the pricing outlook in beer Chile for the remaining of the year. And I want to connect that question with some market share comments that you can make, Patricio. Because we have seen a slight erosion, correct me if I'm wrong, in market share in Chile recently. And I think that in order to protect your margins, like you indicate in the press release, you're going to have to be a bit more aggressive on the pricing front and try to use -- get some operating leverage through that pricing. Could you quantify or give us some orders of magnitude of how this pricing can evolve going forward in 2011 and beyond? And what are your expectations regarding market share in -- for that same question?

Thank you, Alan, for your question. As I said in my introduction, we are planning to increase prices before we regionally planned. Year-to-year, it's most of our business we plan to increase prices according to inflation.

Yes.

But of course we could not do this month after month because it's not practical. It's not a practical practice to do this. But we select one month of the year, two months of the year, in order to make the price increase. We're planning to do it by the end of the year, but probably we are going to do it before, in order to catch up the, number one, higher general inflation that we are experiencing in Chile, so regionally we expect inflation to be in the range of 3% to 3.5%, our operating margins to be in the range of 4% to 4.5%. Most of our SG&A are related with Chilean inflation.

In addition, the fact of oil, energy and the raw material prices growing fastly then we expected [obliged], has to do this. Look, this is not new. Like the last decade, we have been increasing the price of our products, in particular the price of beer according to inflation. And regarding the relation of prices and market share, the regulation, it's between first preference or brand equity of our brand.

Okay.

[That brand]. The full execution at the point of sale, number two, and the quality of our products and innovation, number three. And market share. We have never pursued market share by increasing, by not increasing, by not increasing prices. As you know, last year, we lost two points of market share.

Yes.

Most of it was related to the fact that we lost the volumes during -- after the earthquake and the many consumers tasted the different beers than they were accustomed to and we lost two points of market share. And eventually, we don't have official figures, but eventually we have lost a point, or an additional point, during the first quarter of 2011. But those are just projections. Because we do not have official information and we'd prefer to make market share calculations and projections on just one per billion. And again, again, we are going to increase prices because we need it, because this has been our practice. And we do not expect a direct relation between this and market share.

I hear you. I understand. Okay. And that price increase is going to come earlier than in previous years. How much earlier are we talking now? Instead of the fourth quarter calendar, maybe during the second or third quarter?

Alan, it's -- as you know we prefer not to give public information about our numbers regarding prices and our projections regarding volumes and results. But that's the case.

Got it. Okay.

And one last question. I noticed that -- you, in recent presentations, company presentations and other conference calls, you've been talking planning some expansion into a third country. Could you give us an update on that and any particular reason why it's not mentioned again on the press release? Is it not being as high as a priority? Or is it being harder to find any kind of acquisition targets in any of these countries? Could you -- what's the latest thinking in terms of the strategic move of CCU into a third country?

In many conferences and public information, we have mentioned our strategy regarding this as the following. If you consider the last two decades --.

Yes?

-- we have been growing at a comparable growth rate, our EBITDA of more than 12%, 12.4%, 12.5%. Half of it has come from organic growth. Half of it has been from inorganic growth.

Yes.

And we have said that we expect to do the same for the future. We expect to keep a high level of growth in our EBITDA and this is at least what our efforts are focused on. And we expect the growth in the future to come also from organic growth and from inorganic growth. And in the side of inorganic growth, we have identified four or five different sources of inorganic growth. One of them is to go into a third country.

Yes.

And this is a long-term purpose and it doesn't change quarter-after-quarter. We have said nothing about it. It doesn't mean that we have changed our minds regarding it. But it means that we do not have any -- in any element we form regarding this. But our strategy remains firm.

Got it. I understand that. That's actually very, very clear. So there's major -- you're changing strategy? And the long-term outlook or performance that you have delivered in the last two decades remains one of the longer-term objectives for CCU. Okay.

Exactly. For example, Alan, one of the five sources for inorganic growth in our strategic plan is to transform Argentina into a multi-category operations.

Yes.

Today, it's a beer operation and the fact that we bought a cider and a liquor company, three months ago, is consistent with this. And we expect to make movements regarding this expected future in the following quarters and year-on-year. But again, we depend on the opportunities that we have in front of us and it will depend, obviously, on our ability to capture those opportunities.

Understood. Okay. Thank you so much.

Thank you.

Thank you, sir. The next question comes from Jorge Opaso from LarrainVial. Please go ahead with your question.

Hello, Patricio, Rosita and Carolina. I have two questions. The first one in -- regarding raw materials. If you can give us, please, an update about malt contracts, barley contracts? Have you closed that? Are you -- what are you expecting about malt contracts for this year, regarding 2011, 2012? And the one-year contract and about the grapes, the grapes prices, what are you expecting for this year? Okay?

And the second question is about [Acusa]. Acusa, you had very high comparables in first quarter of 2010. So you were able to increase volumes and margins. If you can comment or -- a little bit more about that? What were the main aspects in the quarter? I know that the appreciation of the Chilean peso favors you, but it was impressive that with very high comparables, you were able to increase margins on volumes. So you've competed [a lot] more in that please, that is? Thank you.

Thank you, Jorge, for your two questions. Look, regarding raw materials, the situation is the following. In some cases, we have contracts for the year, like the malt contract. In other cases, we buy it spot. For example, the case of sugar, we usually buy spot. We have some contracts for -- and it stops for the next two or three months, but we are permanently in the spot.

In the case of the malt, we buy malt for a year from April-to-April, May-to-May and it depends on the volumes and we -- this is our strategy and we never buy futures in order to protect some prices. We prefer to face the spot prices because we are not experts in that, in making money by knowing, by gambling in raw materials. Having said that, our expectations -- our expectations for 2011 of the prices in raw materials are, I think, not good news. For example, malt, 2011, the real figures from January to April and expected value from the rest of the year, on a contract with a little bit more than expected. We have already closed the contract.

But we will face 7.4% higher cost of malt. In the case of sugar, we expect to face 25% additional cost of sugar. In the case of resin, for example, we expect to pay 37.2% higher costs in 2011 compared with 2010. But this is around -- this is in dollar terms. In terms of pesos, it's going to be less because of the appreciation of the Chilean peso. In the case of wine, 22.2%. In the case of oil, 25% to 30%. Yesterday we got good news regarding this. But it's changing every day.

Then the outlook for the year is not -- it's not promising. And these are the reasons why we have a contingency plan, in order to face this situation. Regarding volumes, you are totally right, that comparables in Q2 [excuse here] compared to Q1 were very difficult, in particularly in the case of Acusa, which is our non-alcoholic division, and the comparables are also difficult for Q2 and Q3. I mentioned this in my introduction, I prefer to repeat it because this is very important to be considered.

In the case of non-alcoholic business, our comparables, or the growth of our volumes, Q1 of 2010 compared with Q1 2009 was 9.8%. We were able to grow our volumes by 3.7% in Q1 2011, in spite of the 9.8% in Q1 2010. And it has relations to the fact that we had been growing systematically the non-alcoholic titles of the business. As you know, the Coca-Cola system is much higher than us in the cola segment. Coca-Cola is much stronger than Pepsi Cola.

But to us, we are bigger than them in the other categories, the juice, the waters, the sports drinks, et cetera, et cetera. The non-cola soft drinks. We are growing at a faster rate than cola. Then we have been gaining market share systemically and this is true for the last seven years. And we expect it could be strategy. Then we are optimistic regarding this.

I get advantage of the question regarding comparables to product share in order to mention the comparables for the Company as a whole, Q2 2010 and Q3 2010, are very challenging. You have to consider this [all] information. But in Q2 2010 we grew our consolidated volumes by 9.7%. That's in the case of beer, we grew by 10.3%. And in Q3, by 8.7%. Then we are facing, in the next two quarters, a very tough scenario in terms of comparisons.

It has relation with two elements. Number one, after the earthquake, there was a loss of -- a lot of volumes, which had relation with the fact that some clients were reestablishing their inventories. And also there was a kind of psychological -- [seems] to increase consumption. And it was really a fronting pattern of consumption in these two quarters. And we'll have to face this scenario for the next two quarters. And you have to consider this in your projections and estimations.

Okay. Thank you very much.

Thank you, Jorge.

Thank you, sir. The next question comes from Bert Ford from Merrill Lynch. Please go ahead with your question.

Hi. Thank you and good day, everybody. Patricio, I had question with respect to the wine and spirits business, they still seem to struggle a little bit in the last quarter. You mentioned that grape prices are going to be up sharply here compared to last year. I was surprised with respect to the volume decline in Argentina.

But then simultaneously, it seems as if you have this big up trade effect in wine and spirits. And I was wondering if you could kind of guide us through those businesses, how you see trends in terms of consumption or consumption premiumization, if you will? And maybe some opportunities that you have to maybe innovate at the high end or explore new spirits opportunities and that sort of thing?

Yes. Thank you, Bob, for your question. The cost of the appreciation, because of the appreciation, has been facing Chile. And because of the enormous inflation in Argentina, we have been obliged to increase the price of our exports products in both countries, particularly in Argentina -- you have to consider that in Argentina, the price of the dollar is roughly stable in 12 months, but inflation, including the cost of grapes, is around 25% to 30%. Then we are facing a very tough scenario in terms of costs and we are receiving the same amount of Argentine pesos per dollar. Then we're obliged to increase prices. And increased prices, it means two things.

Number one, to eliminate some lines for some products, which are in -- which are focused on low price per dollar or low margin. For example, cases at $18 or $17 or $19, one year ago, were convenient to export in Argentina. Today it is not convenient to export cases at that price. Then we discontinued many lines, particularly in the UK and in other countries in Europe at that price. Number one.

But number two, we are making an effort in order to focus on higher or high-end products, which provides us with higher margins. In Chile, the situation is not as extreme as in Argentina. Because inflation was very low after the Chilean peso appreciated by 7% or 6%, or by almost 10% in the period, which is not as bad as the 25% or 30% in Argentina, but again, it's very complicated. Also increased prices, in dollar terms, for our exports and we softened a little bit in our volumes.

For the future, the strategy is, number one, to keep our costs under control. And number two, to make our best efforts to increase prices of our exports. And this is very necessary. Because as you know, the return on capital employed of our businesses in the one end, business both in Chile and Argentina are very low. In the case of Chile, we've got 6.7% last year. In the case of Argentina, around 3.4%, 3.3%, which are lower than our cost of capital, which is in the range of 9% to 10%. Then -- this is not a new idea, but it's a very old idea. Let's be honest, we have not been able to get the rosters or return on capital employed that we are pursuing.

And in spirits, Patricio, do you think you've got some opportunities to maybe take advantage of the trade up there?

Yes. In the case of spirits, let me answer both in Chile and Argentina. If you see, today we have a return on capital employed of around 20% and four years ago, our return on capital employed was 0%. And our volumes have been rather stable. If you compare our volumes today with our volumes four to five years ago, they are no more than 10% to 12% higher. And in terms of the improvement, the return on capital employed has changed 100% from the fact that we have been improving our prices and that we have been improving the mix of our portfolio, putting more focus on more premium brands and categories. And we expect to do it more in the future.

This is in the case of Chile. In the case of Argentina, the cider company we bought was mainly a cider company hence, their volumes of cider have also a small operation in the liquid, in some liquid categories and they have one particular brand, in [La Puelo], the grandfather, it's a very interesting brand in some categories. And first of all, we are going to focus on improving our sizes, the size of the operation, but then we are going to put focus and create also a liquor operation in Argentina. And it will take time, but we expect to have positive margins and profits in the future, also, from that category there.

That's helpful. Thank you very much.

Thank you.

Thank you, sir. The next question comes from Allan Lopez from Credit Suisse. Please go ahead with your question.

Hi. Thanks for taking this call, Patricio, Rosita, Carolina. My question has to do with the erosion of market share in Chile. Could you give us more color on the reasons why SG&A expenses are coming down in the beer Chile division? And can you talk about, especially your marketing expenses, would you accelerate these marketing expenses in the coming quarters to recover some of the lost market share and also to fend off competitors? Thanks.

Thank you, Allan for your questions. Look, in 2010, we increased our market share from -- 2009, our market share was 85.2%, 85.3%. And in 2010, our market share was 82.8%. Then we lost 2.5 points of market share. Two-thirds of this affects, roughly, or 1.5% of that effect was against Corona.

It happens as fast as we expect, for a month we were not able to cope with demand and even our competitors also they did -- their main -- their unique factory in Chile, three kilometers from our main factory and they were both strongly affected by the earthquake. And Corona, imported from Mexico, got advantage by capturing 1.5%, or something like this, points of market share from 1.5% to 3% profit.

At the same time, I have to say that Corona has been phenomenal all over the world and they are gaining market share in most of the markets where they operate. In fact, we distribute and we distribute Corona in Argentina in 2011. We are going to -- we are growing our volumes by 60% or 65% compared with 2009. But the earthquake was enormously important in the case of Corona to gain market share.

As it is a premium product, a very premium product on one hand, and it's just sold in one-way targeting, Corona could grow in the future of course, but not too much. I think that the market share we lost against Corona is not easy to recover, because the products are very successful all over the world, but they are there. The point of market share is mainly related with two elements.

Number one, the fact that [InDep] has been discounting strongly, particularly in cans and supermarkets. And there we have lost some market share. And also, because in Chile, today, we have 80 microbreweries competing five years ago, we had zero. Today we have zero [five] or three. Today we have 80. And all together, they have gotten 0.5% of the market share which is not a lot, but if you add the [Corona plus] -- 1.5% plus 0.5% from the microbreweries, plus one point in supermarkets facing the enormous discounts of our -- of InDep, all together, takes a lot in market share.

It's not a matter of the fact that our portfolio is less strong. It's not a matter of execution. It's a matter of the quality of our products. Hence we feel comfortable on keeping and regaining market share in the future. Again, I think this -- I think the first quarter of 2011, as I said before, probably we lost one additional point of market share, compared with 2011. We are in the range of say, 81% or 81.5%, roughly, but we expect it to decrease more than this during 2011, our share.

So, Patricio, so in order to regain this market share, are you going to dramatically increase your marketing expenses for this year? Or it will be only a matter of increasing prices, as you mentioned before?

No, no, we are very consistent. We are also -- if you analyzed the last ten years, the variations in our marketing rate has been very little. The marketing rate has been very stable and we are not going to increase it dramatically. We'll keep the same kind of marketing rate for the future. Of course we are going to make our best effort to innovate and execute it in the point of sale and do our communication very well focused on the preference of our consumers. But this is what we expect to do in the future. And we have done that for many years. But that's the case.

Okay. Thanks a lot, Patricio.

Thank you.

Thank you, sir. (Operator Instructions). Thank you. There appear to be no further audio questions at this time. Please continue with any other points you wish to raise.

Okay. Again, we are very satisfied, having delivered the results we can. And we are aware of the difficulties we have ahead of us. However, we are confident in sorting them out. Thank you all for attending our conference call and I hope to see you soon.

Thank you, sir. Ladies and gentlemen, this does conclude today's presentation. Thank you for participating, you may now disconnect.