Compania Cervecerias Unidas SA (CCU) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to CCU's Fourth Quarter 2011 Results Conference Call. At this time all participants are in a listen-only mode and following the presentation there will be a question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today, February 2nd, 2012. I would now like to turn the conference over to Patricio Jottar. Please go ahead, sir.

Good morning, and thank you for attending CCU's Fourth Quarter 2011 Conference Call. I am here with Ricardo Reyes, CFO, Rosita Cavarrubias, IR Manager, [Felipe Balanseria], Corporate Finance Manager and Catalina Escaffi, IR Analyst.

You have received a copy of the Company's results for the fourth quarter of 2011. On this opportunity we would like to comment on the quarter's results, highlights. And also to share with the audience some reflections on the year we just left behind.

After these remarks, I will gladly answer any questions you may have. We are very pleased with the fourth quarter outcome. At the beginning of the year, we knew that the rising costs expenses would make it more difficult to reach our ambitious goals. As you remember, we focused on a contingency plan trying to protect our margins without hurting our volumes.

After a difficult first semester, particularly in Q2 2011, we started improving our results in Q3 2011. And the plans fully rendered the expected results in Q4 2011. Our volumes grew 10% with a contribution of all the segments, Spirits with 19.4%, Wine with 10.9%, Beer Chile with 8.4%, non-alcoholic with 8.2%, and Beer Argentina with 2.8%.

In addition, we have a contribution of 149,000 [hectare] liters of cider and spirits in Argentina. Part of the contingency plan was to put emphasis with the development and integration of new businesses, which brought a non-organic volume growth of [0.1%], almost one-third of the total growth mostly related to the cider and spirits operation acquired in December 2010. And the distribution agreements with Pernod Ricard and Bauza, a prime Pisco brand at the end of 2011.

These activities were developed in addition to the regular innovation processes. It is important to highlight that we increased volumes despite of a higher average price in all segments in Q4 2011, as compared with the same period of 2010.

In summary, we had good volumes with the higher average price resulting in a 26% net sales increase, compensating the higher costs of goods sold at MSD&A. The EBIT was 41.6% higher and EBIT margins increased from 20.3% to 22.8%. Also, the EBITDA grew 33.2%, and the EBITDA margin was 150 basis points higher than in Q4 2010, reaching 26.7%.

With such results, our full year figures also looked sound after the sharp cost and expenses. Volumes grew 6.4% with a 9% higher average price, increasing net sales [21.7%]. It was almost enough to compensate for the higher costs of expenses since the EBIT margin, before Exceptional items varied from 18.5% in 2010 to 18.3% in 2011. And the EBITDA margins before exceptional items changed from 23.9% in 2010, to 23.3% in 2011.

Finally, I want to remind you about commitment to pursue the full recovery of our margins as we pointed out in our past conference calls. Now, I will be glad to answer any questions you may have.

Thank you very much, sir. At this time we will begin the question-and-answer session. (Operator Instructions). Our first question does come from the line of Bob Ford with Bank of America.

Thank you, and good afternoon, everybody. Congratulations on the results, Patricio. I had a question with respect to the cider business in Argentina which is just tremendous results for the period. Now, I was curious, if you can comment a little bit about the seasonality of that business and the sustainability? And if there were any elements in that other line that are non-recurring in nature to just get a sense of what the outlook might be like?

Thank you, Bob for your question. Regarding the cider, the results were as you mentioned extremely good. In fact, EBITDA of the cider business for the total 2011 year was $8.7 million. We bought -- or we acquired this operation in December 2010. And the EBITDA of this operation during 2010, before we acquired it, it was $3.9 million, or almost $4 million.

Then we have multiplied by more than two times, EBITDA in a year. This is a very seasonal business, most of our -- more than 100% of our EBITDA [start], or almost 100% of our EBITDA [up it seem] Q4 2000 -- in Q4. That was true in 2010. And it was true also in 2011.

One of our goals regarding cider is to move cider from a seasonal product into our regular product and to make it a product to be drank along the whole year. It will take time. We'll [in] the marketing and commercial exports to [hide] these and it will take probably years to accomplish, to fully accomplish this goal. But this is one. This is the first goal we have for cider.

The second one is that today cider is a popular product, drank mainly by people with low level of income. And we want to also [put] cider into our more sophisticated products beginning to happen in Europe. By doing these two things, we could increase EBITDA importantly in the future.

The growth of EBITDA in 2011 this represents by three elements. Number one, we changed the distribution from the old one in 2010 to our own distribution system, which is much more stronger. This is number one. Because of this, we are able to increase volumes by 20% roughly, comparing 2011 with 2010. Number two, we were able to increase prices because we have very good direct sales force. Then we did not go through distributors or intermediaries so we capture higher margins. This is the first element.

Now the second element is that we reduced [statutory] cost because we have shared services for our business in Argentina. The combination of these elements allows us to jump from 3.9% to 8.2%. To change the seasonality in the future and to transform the product into a more sophisticated one in the future also, will allow us to make the second big jump in this business.

Patricio, do you see an opportunity to expand cider into Chile? Or, is this a proposition that you think is more unique to Argentina?

The long run, yes, short run, no. Long run, yes, because cider (inaudible) to become popular in many countries in Europe. And those trends which happen in Europe, the soon, the later rise to our countries. So in the short-term, because in the case of Argentina, the per capita of cider is two liters, something like this. And it's a product which is a regular product consumed by people.

In the case of Chile, hundreds years ago it used to be -- it's interesting, it used to be a popular drink. But, I don't know, in the last half a century, in the last 50 years, cider almost doesn't exist in Chile.

That's fascinating. That's very interesting. Then, the expense improvement, especially in the spirits business was very impressive. Can you disclose a little bit about how you were able to take 900 basis points out of the expense ratio in spirits?

Yes, thank you, Bob, for this question. It happens that our business has a lot of columns of [saving]. And we have in the second semester and the fourth semester, two new sources of revenues which didn't represent new sources of expenses.

First of all, the distribution of Pernod Ricard, we began distributing the Pernod Ricard [liquors] in July 2011. And then, we got the distribution of Bauza. Bauza is 3% to 4% market share brand in Chile, which is an independent company owned by the Bauza family. And we made that -- an agreement with them in order to use their brand. We also bought 49% of the shares of the company owning their brand, not productive assets. And it's a premium brand. And we began to distribute this brand in -- during October, if I remember correctly?

No, (inaudible).

At the end of October, then captured some volumes and some additional margins without increasing our fixed costs. Of course, we increased a little bit our distribution costs for obvious reasons. But our structure is roughly the same. The combination of these two elements has been very significant in our experience of business. In 2012, this year we expect to capture these benefits for this whole year.

Great, thanks for your help. Thank you very much.

Thank you, Bob.

Our next question does come from the line of Alan Alanis with JPMorgan.

Thank you so much, [here]. Congrats on the results Patricio. My first question has to do with market share. What would you tell the -- well, the beers out there on the CCU story that keep pointing to the deterioration of market share in beer in Chile? How do you see it? How do you envision it going forward? And how would you balance those comments with the trends that you're seeing in terms of market share in Argentina?

Thank you, Alan for your question. Sort of, of course (inaudible) to your concern, it's close to our concern. We have a lost 5 points of market share when you compare roughly 2009 with 2011. And 5 points market share in two years, it's not good news. And it's our concern and we are going to put all our focus in order to prevent it not to continually happen.

Having said this, I have to -- I would like to mention two or three things that related with your question. Number one, we compete against (inaudible) in Chile and Argentina. And in Argentina, the long run, we have gained a lot of market share. We began our operation in Argentina in 1994 and 1995. And in those days our market share was 5%. I became a general manager of CCU in 1998.

And our market share in those days was roughly 10%, or something like this. And we have been gaining market share there.

Yes.

And it's difficult to compete against the giant of (inaudible) and not to lose market share because they are -- they compete very aggressively. They are a huge company. They have very good international brands.

Yes.

At the same time, we have faced a phenomenal of Corona, which is an independent company. But we don't know, it could be part of [hinder] in the future. At least this is what analysts write in their reports. We don't know and not answer. Corona is a fantastic brand. In fact, we distribute Corona in Argentina in 2011. We grew our volumes in the range of 50% to 60% with Corona.

Yes.

They have been growing a lot.

Yes.

In relation with the future, we are not comfortable with -- to have lost 5 points market share in two years. And we'll make our best efforts to prevent it to happen in the future. But, of course, we are competing. And we cannot assure that it is going to happen.

Got it. That's very clear. Thanks for your question. The quality of the phone line is not the best. But, I could hear everything that you said. So let me ask you two really quick follow-up questions on totally different topics.

The first one is what are the sustainable margins of your wine business? If we take away the asset sale and what are the main drivers, because I think that one of the most positive news of the quarter, there were many. But, I want to highlight is the increased profitability of the wine business. And my last question is a technical question. Just, if you could tell us what's the tax rate, the effective tax rate that you will be expecting for 2012? That will be it.

Thank you, Alan. Regarding taxes in our budget, we have 18.5% of the corporate tax in Chile and 35% in Argentina.

Okay.

This is what we expect for the year.

Okay.

Regarding the one business. It's an important question. And it's an important issue because as you know the profitability of the wine segment is below our cost of capital.

Yes.

In fact the return on capital employed in 2011, excluding the indemnification of the insurance related with the earthquake of 2010. Excluding, this is 7.1%.

Yes.

It's much better than the returns of capital employed we got four or five years ago where this figure was 1% to 2%.

Okay.

And we are happy with this improvement. But it's not good enough. We have mentioned many times that our long-term goal is to have a return on capital employed the range of 11%. Then we are permanently pursuing this and in order to do this, we are focused in (inaudible). Number one, improve our domestic business.

Okay.

And our domestic business has been improving a lot. In fact, the return of capital employed of our domestic business was a little bit more or in the range of 10% --

Okay.

-- in 2011. And we gained market share -- our market share for the year was in the range of 25% to 26%. And we think that we gained [1.5 points] of market share, particularly if the bottle size of the business where the margins are higher. You start within the leader since the bottle -- in the bottle segments with 22% to 23% market share in 2011. And we are very happy with this.

In the export side of the business we have been putting special emphasis on prices. Or, in dollar terms --

Yes.

[In fact] as an average a full year 2011 we increased the average prices from $22.7 per case in 2010 to $24.4 per case in 2011, which is a lot.

Yes.

And we'll continue it behind this export. Are we going to succeed or not? Are we going to be able to keep the prices at the same time, not to lose the volumes and market share? Of course, there are uncertainties regarding this question. But we are going to put our best efforts on this.

And at the same time, we are making efforts on two things. Number one, cost control. And number two, to capture -- sending synergies in the merger between Vina San Pedro and Vina Tarapaca. All those elements are behind the results we are getting in the wine business, in particularly in Q4 2011, we have some profits related with the sale of some piece of land.

But we consider it to be recurrent and organic because number one, it's not a big amount of money, and number two, we are permanently selling and buying land in our wine business. So it's part of our regular operations. But, if you factor out these [regardless] you have the (inaudible). If you have -- if you (inaudible) provides the (inaudible).

Yes, for the full year, the EBITDA margins are set to be 16.8%.

Yes.

Isolated, tight sales was a 15.8%, it was 1 point less.

Thank you.

There's 1 point of EBITDA margin for the whole year in relation of this element.

Okay.

So it's not too much, but that's it. That's it.

Got it. Those comments are very useful. Thank you so much and congratulations.

Thanks again, Alan.

Our next question does come from the line of Antonio Gonzalez with Credit Suisse.

Hi, good morning. Thank you for taking my question. First, I wanted to make a follow-up on the wine business. Can you just clarify if the break up last quarter that you announced that resulted with you guys having full control of [Vina Leda] contributed significantly to the volume and EBIT growth in this quarter? It was strip out Vina Leda. Could you give us a sense of where would results for the wine business be?

Thanks, Antonio for your question. No, Vina Leda will have a full effect in 2012. Yes, on December we got small -- an insignificant effect. Not in the case of balance sheet because instead of owning 50% of Valles de Chile, now we have 100% of the assets of Vina Leda, then account receivables for example are today now a balance sheet and before they were not there. But that regarding results, the [effects] in 2011 were completely insignificant.

Regarding 2012, Vina Leda will represent 106 cases -- 150,000 cases, which is an interesting amount of cases in a price range -- in a price which is the range of $42 -- $45 per cases, which is extremely interesting because it will provide us with a good brand, with good margins. We need to create synergies.

And we need to put all our focus and effort in order not to lose those volumes because they were managed by Valles de Chile, which have an independent management. And today it's going to be integrated in Vina San Pedro. So in the first half of the year all our efforts will not be in the synergies, in the side of the synergies. But it will be concentrated in the side of keeping volumes.

The second half will begin to think in synergies. All together our estimations are that it's going to represent a positive impact in operating results in 2012 but not significant.

Okay, that's very helpful. Would you have some numbers on -- what was the latest participation of bulk wine as a percentage of your total business? And how will it change after integrating Vina Leda?

I don't have this information here with me. I don't know, Ricardo, if you have that information?

No, I don't have that (inaudible).

That's no problem, I can follow-up later. Yes.

Because the last three years the cost of wine has been very expensive. And because of the [recession] of Chilean peso, the bulk wine business has not been (inaudible).

Sure. And my second question have to do with Argentina. You mentioned in the press release the new positioning that you have for Budweiser Brand. Could you give a little bit more color about how pricing and volume dynamics have been for this particular brand in Argentina? How this has helped you develop a little bit the premium side of your portfolio?

Yes, since this is a good question, Antonio. For many -- look, a little bit of history and then, let's talk on what is happening today and in the future. So we began our operation with Budweiser, it had a premium price of 10%. In the very beginning, and we're talking on 17 years ago, no was 15 years ago. A premium price of 10%. And the reason behind that was number one that we pay a licensed fee of 8.25%.

And the cost of producing Budweiser is higher than the cost of producing the mainstream brand. Then with 10% premium price in those days, the profitability of the brand was comparable to the profitability of a mainstream owned 100% by CCU on one hand.

Then on the other hand, we considered it was important for the image of an imported brand to have a premium price. The Argentine market in those days was very complicated for two reasons. Number one, premium brands didn't exist. The price of [Kilnes], which was the mainstream brand which was the real price of beer and the consumers were not willing to accept different prices on that.

Number one, and number two, Argentina was in a very complicated economic situation. Then, people were not willing to pay premium net for products. Not only in the beer category, but in most of the categories. And we -- after this, then we kept the 10% for some years, I would say, six or seven years. But then, we decided to decrease the price to 100% compared with Kilnes because it was extremely difficult to grow by keeping the price in say [10%].

We could discuss it was -- if it was or if it was not a good decision. In fact, we have our hearts divided regarding the decision. But this is what we decided 10 years ago or eight years ago. And after awhile two things came. Number one, the premium segment began to be developed in Argentina strongly. And number two, the situation -- economic situation in Argentina began to improve, particularly at the site of aggregate figures of consumption. So we realized there was room to price this with Budweiser. At the very beginning we began with 3% premium. Then with 5% and today the average premium price of Budweiser is roughly 8%.

And in some areas it's 8%. In some areas it's 10%. In some areas it's 5%. It depends on the terms of the brand and the characteristic of the different provinces and marketing in Argentina. But you could see our idea is to EBITDA (inaudible). I would say if the mainstream [clues] brand. It's not the premium as Heineken with a premium price of more than 50%. Or a (inaudible), which is the brand of our competitor. Or, Corona, which is 80% to 90% premium price. And so this is not the goal of Budweiser all over the world. It's not the goal in Argentina. But we think we have still room for increasing the premium price a little bit more.

Thank you so much for your comments, Patricio.

Thank you, Antonio.

Our next question does comes from the line of Jose Yordan with Deutsche Bank.

Good morning, everyone. A couple of questions. One was in the soft drink business, I found, I guess all the operating indicators pretty good. But none more than the 230 basis point decline in the operating expenses, et cetera. If you could give us any color as to how you achieve that in what continues to be a pretty competitive environment and I would say you're outperforming your main competitors there pretty easily lately. And just interested in how -- what you've been doing to be able to price above inflation and in general, keep costs under control at the same time.

And then, secondly, if you can just give us an update on what's happening with the grape harvest. As you mentioned a few minutes ago, the grape costs have been high the last couple of years. What's the yield looking like? What's the climate like, maybe it's too early to tell. But, anything you can give us there would be useful.

Thank you, Jose, for your questions. Regarding soft drinks, we have been able to create new category in the last many years, include [milk] categories, and increasing new categories and keeping the same structure roughly. And we think that we have a structure, which is good enough to continue growing without increasing the structural cost of our soft drink operations.

So the improvements in terms of costs are more related with the (inaudible) of costs with the high scale rather than reduction in costs. As you know, we have a leading position those categories which are growing the most, which are all the categories different than the Colas category. As our volumes -- we were [locked] in Q4 and we expect to keep good trend in terms of volumes and at the same time to control the cost of the structure.

The combination of these two elements will allow us to improve in this sense. Regarding price, the situation -- there is a lot of uncertainty because we don't -- Coca-Cola is the leader. They are 2.3 times bigger than ourselves in terms of sales in the non-alcoholic side of the business. Then in a way they rule the prices in the industry, fortunately most of the categories to which are developing the more, which are all the non Colas categories are categories with a premium price compared with soft drinks.

And also with better margins on one hand and on the other hand, we have pushed a lot of the development of illegal packaging. The end of their margins, individual packaging are also very good. Then we have been able to compensate prices through a better mix of products and the packaging. And we expect it to happen in the future. But, of course, we have uncertainty regarding this point.

And finally, regarding costs, here, we have the spot price in most of our raw material, oil, malt, sugar, petrol, aluminum, energy -- energy and [the glasses]. And lastly, but they are in line with what happened in 2011 with some exceptions. In the case of sugar, spot prices are 7% less than the average 2011, which is good news. The price of aluminum also -- the aluminum also is 7% -- was 6% less than it was as an average in 2011. And the price of (inaudible) is 5% higher. All together it represents not a big change of what happened in 2011.

We don't know what is going to happen in the future. So you know our policy is to pay the spot prices in all these commodities and raw material. We have some short-term contracts because in some cases we have stocks, for example in the case of sugar we have a three month stock. But we never buy futures in order to keep the price for the future.

In the case of malt, as you know, because we have mentioned it many times, we buy the malt for 12 months. Then we have stocks. And we find the price usually in the periods of May to May. But it's more related with operational issues than with the financial issues.

And our philosophy behind this is that we prefer to face -- number one, we do not have any ability in order to make money by buying futures in relation with the price of commodities because this not our business. And number two, we prefer to face the spot price immediately. And not to [carry] it through a future contract because if prices goes up we prefer to [start it] immediately and to take the necessary measurements immediately. And not to be, I don't know how to say -- how to say (inaudible).

Numb.

And not to be numb by the fact of having a good future contract.

I guess the more than one raw material I was most interested in was the cost of wine given that the harvest is going to be coming out soon. Just in (inaudible - multiple speakers).

Yes, I didn't mention the cost of wine. Good question, good question. Apparently the cost of wine could increase a little bit, but not significantly. This is what we expect today.

Okay. And if I can just ask one last question?

Yes.

Have you refined your CapEx estimates for 2012 more than during the last conference call?

Yes, but we haven't made public. Here I have information. The last 20-F, we informed to an important CapEx for 2012 in the range of $300 million. This is in the official CapEx we have for 2012, which is in the -- for the 20-F and in the next 20-F we are going to fine tune this figure. But eventually it's not going to change too much. We don't know --

I guess [there's] a problem with the 20-F is that it's written by lawyers and it's always twice as much as you end up spending. But I appreciate if you can't give us any more color on a more realistic number.

Yes, Ricardo.

We'll keep monitoring.

Yes, Jose, this year we are going to publish the (inaudible). We are going to anticipate from June to April. But I understand that it's too late. Our more updated projections is then to -- supposed to be less than the one that we project in -- last year. So for 2012, the budget is going to be less.

But we don't have the final figure.

And you know that on -- relation to the budget, the execution always is less, always less.

Yes, because we're budgeting this, number one. Then we execute investment, number two. And then we pay investments, number three.

But, given the -- well, let's just say that even if it's over $200 million and it's going to be over two times depreciation. So if you can give us any color as to where the larger, the non-maintenance investments would be targeted to? To the extent you can say now. That would be great.

Yes, we need to -- what? We have increased capacity in our distribution systems, and our logistic in the last two or three years. There are some projects that continue in that area.

And also, we need to increase capacity in our production facilities here, Chili, and in soft drink, mainly that.

Okay, great. Well thanks a lot.

Thank you, Jose.

And our next question does come from the line of Jorge Opaso with Larrain Vial.

Hello, everyone. Congratulations for fourth quarter results. A couple of questions. One, the first one is only a follow-up of a last question regarding raw material costs. If you have any expectation or any thoughts regarding malt price. Or, it's too early yet to say that.

And two questions, one regarding Argentina. What are your main initiatives there? You have mentioned some in the conference call but if you could give us more color, your main initiatives to recover or to boost margins regarding the dropping margins for this year. You made up price increases in November. I don't know if you can give us how much they were.

And the last question is regarding the spirits business, if you can give us some details of how much of revenues or EBITDA is the distribution of Pernod Ricard representing? And what's the return of capital employed of that business -- of the Pernod Ricard, only? Thank you.

Yes, thank you, Jorge for your questions. No, regarding raw materials, we don't have expectations much a difference than spot prices for the year. Regarding Argentina, at the end of December, beginning of January, the industry made a significant price increase to cope with inflation.

And we expect it to provide us good results for Q1 2012. I prefer not to say what is going to happen with prices and inflation in Q2 2012 because this is very long run in Argentina. And regarding Pernod Ricard, talking 12 months, that's for 2012, the Pernod Ricard distribution should provide us [say] in the range of $2.5 million to $3 million.

And the return on capital employed of this particular basis, it's enormously because we do not have capital employed for that business different than account receivables. So it will represent an important support to the good 20% return on capital employed that we have in the spirit business.

Okay, thank you.

Thank you, Jorge.

(Operator Instructions). And I'm not showing any further questions in the queue. I would like to turn the call back for any closing comments.

We left behind a very challenging year. But the recent history has shown us that there are no easy years. 2009, with a global financial crisis, 2010 with an earthquake and 2011 with a commodity and energy price rally coupled with expenses and pressures have been three very tough years.

We are prepared to struggle with the challenges 2012 may bring. I would like to close this conference call acknowledging our appreciation to everyone for accompanying us throughout 2011. Analysts and investors, thank you all for attending our conference call and I hope to see you soon.

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation, you may now disconnect your lines at this time.