Compania Cervecerias Unidas SA (CCU) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the CCU's first quarter 2012 results conference call. It is now my pleasure to announce Felipe Arancibia, Corporate Finance and Investor Relations Manager. Please go ahead, sir.

Thank you. Good morning, and thank you for attending CCU's first quarter 2012 conference call. With me today are Patricio Jottar, Chief Executive Officer; Ricardo Reyes, CFO; Rosita Covarrubias, IR Manager; and Catalina Escaffi, IR Analyst.

You have received a copy of the Company's results for the first quarter of 2012. On this occasion, Patricio will lead off today's call with a review of our overall performance, and then we will go on to Q&A.

Before we begin, please take note of our (inaudible) [segment]. The statements made in this call that relate to CCU's future performance or financial results are forward-looking statements which involve uncertainties that could cause actual performance or results to materially differ. These statements should be taken in conjunction with the recent information about risk and uncertainties set forth in CCU's annual report and CCU's 20-F.

And, now, it is my pleasure to introduce Patricio Jottar.

Thank you, Felipe, and good morning everyone. We are very pleased with CCU's consolidated volume growth of 8.8%, considering an increased competitive environment in most of our segments. Nevertheless, we are not satisfied with the 7.0% increase in the normalized EBITDA of the first quarter, consequently decreasing EBITDA margin 210 bps.

Our volumes grew 8.8%, driven by our operations in Chile, which increased [12.4%], partially compensated by the impact of a 1.9% lower volume in Argentina. All categories in Chile contributed to this growth, highlighting the non-alcoholic beverage segment which grew 18.6%, compared to Q1 2011. This confirms the good momentum of this segment, as well as of spirits, which grew 25.4%, reflecting a successful integration of Pernod Ricard products.

Excluding CCU Argentina, prices in Chile increased 2.2%, not enough to compensate inflation and higher pressure costs.

In all, net sales increased 16.2% to CLP281,482 million.

Leaving aside the exceptional item in Q1 2011 related to settlement of the (inaudible) 2011, the normalized EBITDA grew 7.0%, driven by higher gross profit which grew 15.2%, partially compensated by a 20.1% increase in MSD&A.

Overall, the normalized net profit grew 7.4% to CLP40,225 million first quarter.

Now, let me share with you the scenario that we are facing which can affect our results. First, increased competitive environment in Chile. Second, the higher price of fuel in Chile and Argentina. Third, the lower consumption dynamism in Argentina. Fourth, the impact in a number of our segments of the new driving law which reduced the limit of blood alcohol content while driving.

Following CCU's strategy based on our three pillars -- profitability, growth, and sustainability -- we are very pleased with the 8.8% volume growth of Q1 2012, as it is the foundation for our future profitability, which needs, of course, to be coupled with our best efforts to restore margin levels in Chile and in Argentina.

Now, I will be glad to answer any questions you may have.

(Operator Instructions) Alan Alanis, J.P. Morgan.

Thank you so much. Good morning, Patricio. Good morning, everyone. I have two questions. The first one is a bit strategic, or very, very long term, and the other one will be more related to the quarter and the SG&A, the 20%. But, before we go into the quarter, Patricio, I mean, you've seen the transactions in the industry in Latin America for a long time, et cetera. You know what happened in Argentina in the early part of the last decade, of the year 2000, 2001, 2002. And, you saw what happened in the Dominican Republic in the last four or five years, where you have a very, a smaller player being very aggressive, increasing the level of competitiveness in the region. How is the situation that we're seeing in Chile different from what happened in Argentina 12 years ago? And, what happened in the Dominican Republic for the last five years, in your view?

Thank you, Alan. And, this is a very good question. I would say a key question. For many years, we have been preparing our Company to answer that question, because we were witnesses of what happened in Argentina a decade ago, or 10 years ago, and I would say that for that, we were preparing our Company.

And, our answer to that situation has two elements. Number one, we have created a platform where we operate not just in beer but in all the different beverages. (inaudible) our platform, we have focused and (inaudible) at the same time, focused because we have a different business unit dealing with each one of the categories. (inaudible) most of the tension, (inaudible) the [dynamic] tension, in order to reduce our costs and to become a much more efficient Company, even much more efficient if we're operating just in beer, or just in soft drinks, or just in wine.

[Besides of being] synergetic and besides of having synergies, in all these [functions], also includes the focus of our categories, because our business units are focused on producing good quality products, on innovating, on being [good] marketing, and on selling in their largest cities. So, our business units are much more focused on competing in the business than our competitors, which are obliged to ran all the other processes, [asset] distribution, accounting, IT, et cetera, et cetera.

This is the answer, the answer number one. And, the answer number two is that we have a very good partner in the beer business which is Heineken, which is a global international partner. [It] provides us with two [interesting] elements. First of all, the brand. Heineken is the best example but, of course, we have other brands which are interesting for our portfolio in Argentina. We do something with other brands and then that we are going to do in Chile in the future. And, secondly, they have the experience of being first, [I think,] in more than 200 countries, or more than 200 countries in the world.

I think that these two elements makes a difference when you compare the situation of Argentina a decade ago and Dominican Republic in 2012.

Having said that, to compete against InBev, it's challenging, I mean, because they are huge on one hand. So, we have been focused to penetrate in a market. And, they are also very smart. But, our philosophy is that to compete against the big competitors and against smart competitors, that at the end of the day obliges you to be much smarter and much competitive. And, at the end of the day, this is good news for CCU.

Yes. No, I agree. I agree. I mean, it really stretches you. It brings out the best in the team. Now, in that context, my second to last question is, how do you put the growth in the SG&A that we saw in the first quarter within that longer-term context? And, what should --? What's behind it? And, what should be expected going forward?

Yes, this is also a very good question, Alan. Look, as I mentioned in my introduction, we are happy with the volume growth, (inaudible) 8% (inaudible) volume growth. But, we are not happy with the EBITDA, because we decreased our (inaudible). It's (inudible) CCU. It's not the first time that we increased our volumes that we decreased our EBITDA [margins]. At the end of the day, we have been able to increase our margins again and to take advantage of volume construction.

Now, what I'm trying to say is that to bring volume, according to our opinion, it's an investment. And, we are going to take the profits in the future of this.

What happens with the cost in the first quarter? Most of them are mainly related to the fact of having increased aggressively our volumes. In fact, the total MSD&A grew by 20.1%. Let's factor out Argentina, because in Argentina, with a big inflational increase in costs and price at the same time, if you factor out Argentina, where MSD&A grew by [28.4%], in Chile, our MSD&A grew by 16.9%.

And, 85% of this [effect], roughly, 83% of (inaudible), but this was [present] in three elements -- marketing, distribution, and expansion [of] sales. Marketing, because we increased them by [18.8%], because we were very aggressive in marketing efforts in the first quarter. Secondly, distribution. Distribution costs increased by 35.3%. There, we have our volume (inaudible). Number one, our volume [expands]. Number two, the price of oil. And, the pressure in cost of labor, which today unemployment rate is [still] 6%. So, we are facing a lot of pressure in labor costs. And, finally, volumes were higher than what we were expecting, in quarter first 2011. And, we prepare our distribution system for some level of volume. When volumes are higher, the marginal cost of serving the marginal volume is very high, because we need to go to the market and to contract as (inaudible), post-contract, in hiring trucks and other things. And, the marginal costs are very expensive.

Then, is the third, marketing, distribution, and finally expenses of sale, because we [remunerate] our sales force according how they perform in relation of their objectives. And, they over-performed their objectives in Q1 2011, as our volumes were very good. So, we overpaid the sales force also.

These three elements -- marketing, distribution, and the expenses of sales -- again, with (inaudible) 83% of the additional MSD&A, of our additional costs in Chile, of our additional MSD&A in Chile.

But, again, the 8.8% of additional volume out there, and we expect to make that possible in the future.

That's very useful and very clear. Thank you so much, Patricio.

Thank you, Alan.

Allan Lopez, Credit Suisse.

Hello. Thanks for taking my questions. The first one I have is, can you give more details regarding the change in mix in the beer Chile segment that caused the cost of sales, as a percentage of sales, to increase to 40%?

Thank you, Allan, for your question. That's relation with the [standard] we have been facing in Q1 2012. (inaudible) coming from InBev which has been discounting cans in supermarkets. I mean, this is not the first time they do this, in the last many years. And, we have answered [in a while] where we can, sometimes during most of the week, and we have reduced our price in cans in supermarkets.

Because of this, the mix of cans increased, consequently, the cost of, the direct cost of selling beer, also. But, again, it's not the first time that that happened in the last many years. That is the reason why.

Perfect. Thank you. And, my last question is, what is the current gap in price per [hectoliter] between the Modern and Traditional channel in Chile? Can you comment more on that?

Yes. Look, we have -- it's an interesting question. And, we have in our balance corporate an indicator, because it is not just for beer but for every single operation, in Chile and Argentina, and this (inaudible), it indicates or shows up the margin provided by our hectoliters sold in supermarket, compared with the margin provided by our hectoliters sold in the other channels. And, of course, we have the purpose to increase this indicator up, in the volumes. In supermarkets are growing at a faster pace than the volumes in the (inaudible) channel.

Long term, we have been able to deal with it. [Not] volumes, but margins in supermarket are lower than margins in other channels. We have it separated of course by different business units and by different supermarket chains. And, I could say that they're lower, but I prefer not to make public information on which are the exact figures, because we are using permanently those elements in our negotiations with supermarkets and other channels. Then, I prefer to be very cautious with the release of that information, Allan, if you don't mind.

No, I understand. Thanks a lot.

Thank you.

Jose Yordan, Deutsche Bank.

Hi. Good morning, Patricio and everyone. I just have a follow-up to the earlier question on competing with InBev, and I mean my impression was always that the reason, the way, this is different is that you have a gun pointed at each other at all times, given the fact that you have the power to retaliate in Argentina, if they were to get too aggressive in Chile. Now, it sounds like they're getting aggressive in Chile, and you haven't retaliated in Argentina. And, I guess, I mean, how do think about, you know, what does it take to exercise this nuclear option, if you want to call it that? You know, and so where are --? How do you think about that? And, where, you know, is it true that a lot of the competition in Chile has been through discounting, and it's hurting your pricing in Chile? And, how would you think about how to retaliate in Argentina? And, then, I just have a couple of follow-ups on the [mix] of the quarter.

Thank you, Jose, for your question. I would say that the fact of competing against InBev in Chile and Argentina, more than retaliation power, provides us an environment where it's just, I'd say absurd, to become irrational in one market, because it could spoil profitability in all markets.

We make our best effort to have a good operation, both in Chile and Argentina. I have to say that if you consider the last 10 years, we have been gaining more market share and EBITDA in Argentina than InBev has been in Chile, both in terms of market share and EBITDA.

So, you could say that it's logical that the (inaudible) of InBev of decreasing their participation in the Chilean business. But, this is a very delicate balance, and we try to have a profitability both here and --. Of course in some moments, we're being [starved] badly in Chile, and we have been more aggressive in Argentina. It's something, this is something which is there, of course. It's part of our daily conversations and actions. And, in the last many years, it has been useful to keep profitability both markets, and I expect that this element we're just going to see profitability for the future also.

OK. Great. And, I guess a quick question for Ricardo. Your tax rate was much lower in the first quarter than the, sort of, mid-20%'s you've been reporting. How should we think about tax rates going forward? Is that a one-off? Was that a one-off situation?

And, then, my other question is you have almost $400 million in cash, and I guess over time, the way you pay your dividends, it's on a payout of earnings. And, cash tends to pile up a little bit over the years, and every certain number of years you do an extraordinary dividend. Should we --? I mean, is cash getting to the point where we could expect extraordinary dividend in the event there's no M&A?

Thank you, Jose. Related with the tax rate, that has relation with two elements, mainly. First is that in Chile, the corporate tax rate this year reduced from 20% to 18.5%. Now is in the Congress our reform of the (inaudible) that you return to 20% in the future. We don't know if it's going to be approved in this way or not. But, [it is] whatever. In the first quarter, we have 18.5%. That's going to become (inaudible).

And, the other element is that there was an exceptional item last year, related with the compensation obtained by the US companies that was taxable. So, there was a one-time (inaudible) payment last year that is not present this year. And, so, that explains the decline in the tax rate.

Ricardo, let me say. This is Patricio. I am going to face the wrath of Ricardo, a little bit because of (inaudible). We were informed yesterday night of the projects sent by the government to the Congress in order to make some changes in taxes. And, one of the initiatives with these tax projects that we learned about this just a few hours ago, is that today wants to tax one-way packaging that (inaudible) bottles and cans. We don't know if it's going to happen or not.

We are against that. We think that the taxes are always, [pretaxes] are always about (inaudible). But, having said that, we think that it happens going to provide an advantage to returnable packaging compared with one-way package.

Presumably, that would be good for you, given that your competitor is bringing a lot of one-way package from California.

I mean, this is true. But, again, that is, it is against our philosophy to support tax increases.

Yes, for everybody. And, then, about the dividend and the cash balance, et cetera?

(inaudible) of cash we have. We do not consider it cash if it is part of the plan that we have to finance future acquisitions, you know, that there are (inaudible) projects to non-organic [terms] of growth for the coming years. And, part of this is going to finance with the cash we have, and the possibility to increase our investments (inaudible) in the future. So, it has not been discussed (inaudible).

And, I [agree] with what Ricardo is saying in relation with what Alan Alanis asked to me at the beginning of the conference. We work with (inaudible). We have been able to create the (inaudible) before. And, we have diversified a lot our EBITDA generation base. If you ask about 20 years ago, more than 90% of our generation of EBITDA was based on the beer business. And, today, it's 40-something percent, 45%, 46% of EBITDA comes from our beer business. And, to grow now, the business has to [be in] diversification. We start almost (inaudible) on one hand, and on the other hand, business that (inaudible) generation, which gives us more tools in order to defend against competition.

Right. Did I hear you right that you were, that you have, you say you have, five projects that you're analyzing? You were breaking up there a little bit. So, if you could confirm that? And, if you can remind us what's your CapEx budget, or your forecast for CapEx for the year would be, outside of M&A of course?

Related with CapEx, because of the volume growth we have experienced these last years, we are running almost full capacity in the last season, December last year. So, we are investing more than [ordinarily] what used to be the (inaudible) investment in the past, more than used to be the maintenance CapEx. And, in relation to that, we have five projects with entering a third Latin American market, Paraguay, Uruguay, Peru, Columbia, or some of those countries. We are looking for alternatives there. Entering the (inaudible) business in Chile. It is the only way that we are not participating. Increase our stake in the (inaudible), that's where we have the [sale of plant] that happened some years ago. And, in out of Chile, in Argentina specifically, we developed the same business model we have in Chile of multi-beverage company. And, [we offer] right now beer, spirits, small investment in spirit, and wine, and the (inaudible) business we acquired in 2010. So, and besides, there's enough (inaudible) to participate in the relative (inaudible) is about 200 liters per capita (inaudible) in Chile.

OK. Great. Thank you very much.

Thank you.

(Operator Instructions)

Are we supposed to conclude, excuse me?

We have no further questions at this time, sir. Please continue.

OK. In conclusion, we are not satisfied with the growth in margins. However, we are pleased with the volume growth as it is the foundation for the Company's future profitability.

Before we conclude, many of you know Rosita Covarrubias, here in my right, will leave CCU according to CCU's corporate (inaudible). And, I would like to thank her for her dedication to CCU and valuable contribution to the Company during this past year. Thank you, Rosita.

Thank you for everything, as well.

Thank you all for attending our conference call. I hope to see you soon.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect your lines.