Compania Cervecerias Unidas SA (CCU) 2011 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 Friday, the 4th of November 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. Go ahead, sir.

Good morning and thank you for attending CCU's third quarter 2011 conference call. I am here with Ricardo Reyes, CFO, Rosita Coverrubias, IR Manager, Carolina Burgos, IR System Manager, and Catalina Escaffi, IR Analyst. You have received a copy of the Company's results for the third quarter of 2011. On this occasion, I would like to comment on the quarter's results highlights and also address some new developments. After these remarks, I will gladly answer any questions you may have.

As many of you will recall, I explained in our last conference call that CCU had a tough second quarter because of the difficult volumes comparables since, in 2010, we have an outstanding second and third quarter, mostly due to the inventory recuperation and to the consumption acceleration that followed the quake. And because costs and expenses, since the commodities fuel and energy prices rally did not start until the beginning of 2011, affecting thereon the margins when compared with those of 2010.

As the Q3 2011 comparables, were also difficult, we decided to take various actions in order to stop the margins reduction. First, we increased prices in almost all our categories in the last month, which contributed to an 8.4% higher average price in Q3 2011 as compared to Q3 2010. In spite of higher prices, our consolidated volumes didn't suffer, but increased 5.3%.

Second, we placed significant focus and innovation in terms of flavors and new product lines. We find examples of these activities infused in Chile with the distribution of the Pernod Ricard brands and the successful sales volumes of cider and spirits in Argentina, among other non-alcoholic beverage products. The non-organic volume growth explains 30% of the Q3 2011 consolidated volume growth.

Third, we have been cautious with expenses, resulting in the reduction of 14 basis points in the MSD&A to net sales ratio in the Chilean businesses. And fourth, another favorable highlight, which contributes the Q3 2011 better results, is the 8% stronger average Chilean peso vis-a-vis the US dollar, which reduced the Chilean peso impact of the higher commodities dollar price.

In summary, we have good volumes with a higher average price, resulting in 13.9% net sales increase, compensating an important part of the higher cost of goods sold and MSD&A. EBIT and EBITDA margin were 70 basis points lower than in Q3 2010, narrowing the 450 basis points gap we saw in Q2 2011 and marking the change in tendency we are looking for.

I would like to share with the audience an important reflection about the brand equity of recent evolution, being one of the key milestones for CCU's sustainability, we monitor carefully the consumer's first preference for our brands, with the proxy indicators of CCU's brand equity. The first preference anticipates our capability to increase prices and/or volumes. The September falls was quite positive, particularly for first domestic lines, which increased 8.2 percentage points due to the significant improvement of the Gato brands.

Second, nectars with 4.4 percentage points with the Watt's brands, and third, Beer Chile, which increased 4.3 percentage points, due mostly to the Cristal brand. Finally, I want to highlight our commitment to continue pursuing the sure recovery of our margins as we have managed to show in Q3 2011. Now I will be glad to answer any questions you may have.

Thank you, sir. (Operator Instructions). The first question comes from Jorge Opaso from LarrainVail. Please go ahead with your question.

Hello, Patricio. Hello, everyone. I have two questions. The first one regarding the Beer Chile division -- regarding the competitive environment, after the price increases you have made during the year, if you can give us your further detail about the service, have you see that Chile has followed you or about your market share figures.

For example, regarding the behavior of Corona brand, I remember in the fourth quarter, your results conference, that there was a little -- a slight decrease in market share volume in behavior of Corona. If you can give us how Corona has been -- the performance of that brand during this year.

And the second question is regarding the Cervecerias Argentina, beer in Argentina. Regarding the SG&A line, if you can give us further detail about that increase as a percentage of revenues, we have a certain figure in the press release, but if you can deepen the [frees] that explanation. Thank you.

Thank you, Jorge, for your questions. Regarding beer in Chile, as you know we have been facing tough competition in two dimensions. First of all, in the imported brands from Corona. Corona has been growing importantly in the last years and we have been losing a little bit of market shares, I have mentioned in other conference calls.

And on the other hand, or on the other dimension from Cervecerias Chile, which has been competing aggressively in price, particularly in cans in supermarkets. Because of these two effects, we have been losing market share. We lost 2.2 points roughly in 2010, particularly after the earthquake, declining our market share from 85% in 2009 to 22.8% in 2010.

And in this year, we continue losing market share. We expect that we are going to close the full year 2011 with an 18.1% market share, probably the lowest -- this is an average of many months. Is probably the worst period was July and August, the beginning of Q3, because we increased prices, importantly, as I mentioned in my introductory speech.

But at the very beginning Cervecerias [Chile] followed, for a month or for month-and-a-half and we lost some market share. But then they followed, on one hand, and on the other hand, I think that we are begin particularly aggressive in our marketing campaigns and we are increasing the first preference of our beer portfolio. As we mentioned in my introduction also.

We don't have a final and [that's for] the data regarding market share. We have just estimations, but our estimations have been [substantial]. We are improving our market share in October also. All together, our best estimation for the year, but again, it is an estimation that we are going to keep the 81% that we got in the first half of the year also in the second half of the year all together, and we are going to close with 81% market share. And we expect to keep this market share or to improve it slightly in 2012.

Regarding Argentina, as you know, first regarding inflation is a big problem in Argentina. The real inflation it's in the range of 25% on one hand and the salaries of the workers were the lowest salaries in our company are under a big pressure because of the unions. We have many -- we have had many problems because in many cases, some workers have salaries which are higher than their bosses.

Of course, the situation should be corrected because otherwise it's not sustainable. Then we have been increasing also the salaries of the bosses, and have a lot of pressure. Fortunately, we have been able to increase prices without losing consumption -- per capita consumption. And at the same time, we are increasing a little bit for slightly our market share.

All together, we have been able to cope with this situation and we expect to have a good balance in Q4 2011 and also in 2012. But if you consider one particular month or quarter, there are many distortions in relation of the combination of costs and prices. But again, we feel comfortable about our ability to transform cost pressures into price without losing volume. Or in other words, we feel comfortable on our ability to keep making money.

Okay, very clear. Thank you.

Thank you, Jorge.

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

Yes, thank you so much. My question has to do with this other income -- non-operational. You're showing what's CLP3.6 million gain in the quarter. Could you explain what are these derivatives contracts and what's the -- yes, what's behind it and what's the outlook for them?

Yes. Alan -- Ricardo. Hello. Thanks for your question. Ricardo Reyes will answer your question.

Yes, this is -- hi, Alan. This is mainly, Alan, related with taxes. This gain has a negative effect on taxes. So the bottom line is almost zero. What's happening is that when we do the hedge of foreign exchange currency, this has an effect on taxes. So in order to offset that effect on taxes, we need to add additional foreign exchange. But when you pay more taxes, that's what additional foreign exchange hedge creates a gain that offsets that. And on the opposite, when [as your rates] are a lost, that creates a positive effect on taxes. So that is the main explanation.

Go ahead.

Bottom line is zero effect.

But do you -- do you expect that to go forward? If we think about, let's say, in the next quarter you have a loss and it's going to be compensated with lower tax rate, so you do expect that the net effect of these derivatives, including taxes, should offset each other and be roughly zero ahead.

Yes, yes. We calculate or determine the hedge to have bottom line zero effect.

Got. And these are non-speculative, just coverage, correct?

No, that means, in other words, our balance sheet is completely hedged. We do not take currency risks in our balance sheet -- in our balance sheet.

Okay

And we have different effects in different accounts, but bottom line, we're completely covered. And at the same time, we do not cover the future cash flows. We just cover the balance sheet.

Okay. Understood. Then a follow-up to that. We've seen a decline on dividends, correct, this year? What is the outlook of dividends? And if you could remind us your dividend policy for CCU, please.

Yes, the dividend policy of CCU is to pay 50% or more of our net profits each year.

Yes.

[Recently], we have been paying in the range of 50% to 55% or 60% in the last -- in the last many years. And there is no evidence that we are going to change this policy.

Understood. Okay. That's clear. And last question. Any update -- I know that in a large component of your communications to the market and your presentations, you've been talking about entering a third country and getting into other lines of business and so on. Any update in terms of what your strategic thinking or strategic priorities regarding non-organic growth, Patricio?

Yes. Nothing new, Alan, on what we have said in our press release and in former conference calls. We have the intention to grow inorganically in many dimensions, which are well known. I'm not going to repeat them.

Yes.

And we are pursuing, to do this, then of course, we cannot make public our efforts behind particular targets until we execute them, but we are committed to do this. As I have also mentioned many times, we are a conservative company and we do not like to burn money or make a deal just for saying that we have done it. We are going to make a deal if the outlook is convenient for us and if the price is interesting and if we have a good perspective on doing money. And that's it.

Yes. That's very clear. Thank you so, so much.

Thank you.

Thank you. The next question comes from Robert Ford from Bank of America Merrill Lynch. Please proceed with your question.

Thank you and good day, everybody. Ricardo, I just wanted to make sure I understood because I thought I did and then maybe I don't. But my understanding is that the hedges that you put on are to offset taxable gains or losses that you'll have on foreign exchange positions that are required for the purchase of dollar denominated inputs. Is that correct?

That's correct. We have a foreign exchange position in different tax environment that creates and -- as the effect -- nevertheless you hedge on the position at the foreign exchange level that create an effect on taxes. So in order to offset that effect on taxes you need to add additional foreign exchange to offset that. So bottom line, at level of net income, the objective is to have zero effect.

Great. That's -- then I'm on the right page. Okay. And then when -- Patricio, when you mentioned that you're comfortable in terms of your ability to maintain your market share at about 81% for 2012, do you feel you need to invest a little bit more in the brands, given the strong preference rates that you've just measured, or can you do that at similar or even more efficient levels of brand investment?

Thank you, Bob. We are working and finalizing our budget for 2012 and preliminary, we expect to keep our marketing rates.

And then, with respect to the new joint venture with Pernod Ricard, can you comment a little bit in terms of what that brought on in terms of incremental volumes and what kind of margins that mix has?

Yes. Looking bottom line, the Pernod Ricard division should represent additional EBITDA for us in 2012 in the range of $3 million -- $2.5 million to $3.5 million, depending on volumes and margins. But this is a range of additional EBITDA, which the Pernod Ricard deal will bring to us.

In 2011, it's going to be a much smaller amount of money for two reasons. Number one because we began we began the distribution on July the 1st. And second, because we have some one-time costs associated to the transfer of the distribution from the former distributor to CCU and also we have some costs that we have to pay -- the cost of learning some things in relation with the distribution. But all together, the figures are in the range that I am mentioning.

Then it's important, for us too, because it's an interesting amount of money. On the other hand, I would say that most of the doors of the restaurants are open for CCU, but I would like to say that, for the fact of having the Pernod Ricard brand, which are fantastic for some restaurants and some clients in on premise, it's good for CCU in order to better open some doors. And that is effect is very difficult to quantify. Then I would like to say that we are very happy and proud to have the distribution of the Pernod Ricard brand.

That's great. And do you have kind of a non-compete with Pernod or are you in a position where you can garner additional distribution opportunities with other wine and spirits companies?

In fact, today, in a way, we are competing against Pernod Ricard because we have our own brands. And Pernod has a line of [two] brands. And we also have pisco. And they don't have pisco in their portfolio. But at the end of the day, all the spirits that compete -- that's among -- compete among them.

Having said that, we have agreed not to launch whiskeys and not to launch vodkas and not to compete in some level of prices with the products of Pernod Ricard in the rum sector. This is the situation. But I would like to say that we're not thinking of launching our own whiskey and in one moment of time, we're thinking of launching our own vodka. But this was a very small business and it was very difficult to make money. So there is pictures in both by Pernod Ricard to our portfolio are not -- are not meaning for us. And we are very comfortable with that.

Great. Thank you very much.

Thank you.

Thank you. The next question comes from Jose Yordan from Deutsche Bank. Please proceed with your question.

Hi. Good morning, everyone. Just a -- first of all, if you could remind me what the contracted price for malt was for the period, I guess, June 11 to May 12, and how much of an increase did you have in your dollar cost increase. And then if you could also -- my second question was more on the sugar and packaging side on the soft drink business. How are you hedged there and what's your outlook for those inputs?

And then just finally I just wanted to see if -- I think you had indicated earlier in the year that the Argentine cider business had a contribution of EBITDA of something like $3 million, $4 million, but that it was going to be heavily weighted towards the end of the year -- third and fourth quarters, especially. Is that still the case, both on the total and the seasonality of the profits?

Thank you, Jose, for your question. I will address your question regarding cider and then will ask Ricardo to provide you with the information for malt and sugar. Here we have all the data to answer your question. And then, we do, as you know, we do not hedge, but in some cases, we buy raw material in advance for a year in the case of malt and for a few months in the case of sugar.

More for operations reasons rather than to hedge because, as we have mentioned, we do not have the practice of hedging cash flows. And we prefer to face market price and cash flows in every dimension. Ricardo will provide you immediately with the figures.

Regarding cider, we are now in October and November, facing the two most important months of the year. 80% of the volumes are made on these two months. And more than 100% of the profit because we lose money with cider from January to August and we begin to make a little bit of money on September and we make most of the money on October and November.

And considering what we have seen in August, September, and in October, we are very confident on our ability to make an EBITDA in the cider business today in the range of $6 million rather than $4 million, which was our initial expectation. And this is number one. Then we're very happy with these results.

Regarding for the future, we have two main challenges in the cider business. Number one, to change the seasonality of this business. Or in other words, to make people drink cider along the year and not only for Christmas and New Year. This is our challenge number one. And our challenge number two is to improve quality on the premiumness of the category because this category is represented mainly by products which are sold at a very cheap price. And the perception of quality of cider is not too good.

As you know, in Europe, the cider is beginning very popular and many high-scale bars you could drink cider and it's beginning to be a very hot drink. And at the end of the day, the trends which are happening in Europe at the end of the day, come to our continent. So we expect also to make Argentineans to become more [front] to drink high quality and to pay more price for cider. If we are able to do these two things. On one hand, to make people drink cider along the year. On the other, to make people pay more money for cider because it's a question of quality higher and to make much more money.

On the same time, we are capturing more synergies than we were expecting originally. And this is the reason why we are going to make $6 million rather than $4 million in 2011 because to the consumption in 2011 is not increasing. And all together, we are very happy and positive regarding the cider venture. Ricardo, please, regarding raw material.

Yes. Hi, Jose. Regarding the cost of raw material, as we mentioned, we start to suffer this year an increase in most of them. In the case of malt, this has not been very significant, the increase in the cost. Only 4% when we compare the cost in Q3 2011 and Q3 2010. So the cost of malt, as an input for beer production has increased, in this case, 4% in US dollar.

So it has been offset by the appreciation of peso. But in the case of the sugar and the packaging material, this has been much higher. In the case of sugar, the cost of sugar has increased 38%, Q3 '10 versus Q3 '11. And in the case of resins, PT, has increased 48%. And in the case of cans, aluminum has increased 14% in dollar terms.

So the most significant it has been affecting our non-alcoholic division related with sugar and resins in the range of 40% to 50% higher cost versus the third quarter of last year. As you know, and Patricio mentioned, we do not hedge these commodities.

Okay. Great. That's it. Thank you very much.

Thank you, Jose.

Thank you. The next question comes from Antonio Gonzalez from Credit Suisse. Please proceed with your question.

Hi. Good morning, everyone. Thanks for taking my question. I wanted to make first a follow-up on the questions that have been asked already on the Beer Chile division. Can you -- just to make sure I understood correctly, you mentioned that your first preference for beer in Chile is increasing something like 4.3 percentage points, but market share continues to erode and it's slightly below 81% as of the end of the third quarter. Can you help us reconcile these two figures and is there any point in which you expect both numbers to move in the same direction?

Thank you, Antonio. This is a very good question. We may shift the first preference four times per year at the end of each quarter. And last measurement was received on October 15, October 16, two weeks ago. It was a very positive measurement. We increased the total first preference of our beer portfolio by 4.3%, as I mentioned before.

At the same time as I mentioned that we're losing market share during this year, but the worst period in the year, according our estimations, because we don't have official data was July and August. But we think that in September and October we are beginning to regain market share gain. So market share is growing a little bit in the last two months. Same thing is happening with first preference. Then they're moving in the same direction.

Okay. Great. Thank you. And secondly, I wanted to ask, you mentioned in the press release some collateral adjustments that you did for returnable bottles in Chile. Can you give us a little bit more color on what is this adjustment related to and how would the margins in Chile would have looked like without this adjustment?

Yes, Ricardo, why don't you give your best explanation?

Yes, well, the bottles we used, the returnable bottles, are given to our clients and they pay a collateral for that. So we, every year, do an estimation on how much of this collateral are going to be claimed by the clients, eventually in the future. So and this is according to an inventory control of the bottle, the empty bottle and the full bottle we have in our possession and the ones that are in the possession of our clients and an estimation of the bottles that are on the consumer. And that creates this effect that was mainly in the case of the beer division that positively affect this year.

And also in 2010.

Yes.

And this year was a little bit higher than in 2010. But it's a recurring effect.

Okay. But the margins of the beer division in Chile would have increased even without this collateral adjustment, that's right?

Exactly.

That's right.

Okay. And finally, if I may --?

Excuse me, Antonio. We made it every -- in September of each year. And each of the other -- is the other face of the coin of depreciation because we depreciate the bottles because once bottles are disappear in the market. And the other face of depreciation is the fact that our clients don't have the bottles to bring them back to CCU and claim the amount of money that they paid for receiving the bottles the first time.

So we estimate, can we make a correction of this liability year after year? It would be very aggressive we could consider that this liability to be zero. Because the real thing is that at the end of the day never our client comes to CCU with a bottle in order to bring his money back.

Sure.

That would be conservative and we have decided to establish the liability, considering the total amount of bottles, which are in the hands of our clients, assuming that they're going to come to CCU and collect the money back, which never happens. But again, it's a conservative policy and we feel much more comfortable.

And each year, in the picture of July and August, we go to the point of sales and we make -- we calculate that the total number of bottles which are there and considering this we make an adjustment of the total liability we have for this effect. And this is too in beer and also in soft drinks because we also sell some soft drinks in returnable packaging.

Sure. That's very helpful. Thank you. And finally, if I may, can you talk a little bit about the decision to spin a part of your wine assets, how large is the spinoff and how are you, I guess, evolving in the road to changing your product mix towards more premium brands after this spinoff?

Yes. [Spias the] Chile was a subsidiary of [Binia Sampero] and Binia Sampero owns 50% of its shares. So Binia Sampero is not able to consolidate its restarts on one hand. And on the other hand the fact of having just 50% made much more difficult to capture some synergies. And we -- and the other 50% was owned by a company which is best (inaudible) with [Mr. Lucce], which is the chairman of the board of Binia Sampero.

So we decided to demerger that company and we made a public release with the details. But in very few words, one part of Mr. Lucce kept half of the volume and we kept the other half of the volume and he gets half of the assets and we get the other half of the assets. And it's going to be terminated, probably at the end of November or during December.

What is going to be the final effect? The final effects are going to receive a brand which is the [Leyda] brand, which is a very interested brand. This year, the Leyda brand is going to sell about 140,000 cases, which is a lot. And the average price is in the range of $40 to $45 dollars per case. So it's a very interesting brand in our portfolio because it's not small and the price is very good. Then our expectation is to bring it -- to bring this brand into our portfolio and to operate it with full synergies.

And this is completely consistent with the efforts that we are doing in Binia Sampero in order to improve the average price per case of our exports, because, at the end of the day, it's the only way of making an acceptable return on capital employed on this business. And we have been increasing the average price that four or five years ago used to be $20 per case, today we are selling in the range of $25 to $25.50 per case. And the fact of receiving Leyda in the range of $40 to $45 is completely consistent with this. And then we are very happy with the deal and we expect to receive all the effects in 2012.

Perfect. This was very helpful. Thank you very much.

Thank you.

(Operator Instructions). There are no further questions at this time. Please continue with any other points you wish to raise.

Yes. Q3 2011 was in line with our expectations as we reverted the Q2 2011 tendency and we are already into the most important quarter of the year. Provided that the Chilean economy is not seriously affected by the present world financial instability, we should reach our goals for the year. At the same time, we are actually looking to fulfill with our longer-term strategic goals. Thank you all for attending our conference call and I hope to see you soon.

Thank you. This concludes CCU's Third Quarter Results Conference Call. Thanks for participating. You may now disconnect.