Compania Cervecerias Unidas SA (CCU) 2013 Q3 法說會逐字稿

Good morning, and thank you for attending CCU's third quarter 2013 conference call.

Today with me are Ricardo Reyes, Chief Financial Officer; and Carolina Burgos, IR Senior Analyst. You have received a copy of the Company's results for the third quarter of 2013.

Ricardo, in the presentation of Patricio, who could not participate in today's call, will lead the following conference call with a review of our overall performance, and we will then move on to Q&A.

Before we begin, please take note of our cautionary statement. 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 additional information about risk and uncertainties set forth in CCU's annual report and in CCU's 20-F.

And now, it's my pleasure to introduce Ricardo Reyes.

Thank you, Felipe, and good morning, everyone. We are pleased with CCU's third quarter 2013 overall performance where the EBITDA grew 6.2%. On organic basis, EBITDA increased 6% driven by Chile and wine business segments.

The EBITDA of the Chile business increased 10.3%. Organically, EBITDA grew 8.9% driven by beer Chile operational segment, which contributed with 7.7% growth and non-alcoholic beverage with 15.9% growth, mainly as a consequence of higher volumes coupled with higher average prices.

These higher average prices was mainly due to the prices increase done at the beginning of the year and at the beginning of the third quarter 2013.

Also, the wine business segment showed a significant 20.4% EBITDA growth this quarter, due to higher average prices, due to better mix and lower grapes cost.

During this quarter in Chile, we faced important distribution expenses pressure related with the higher real salaries caused by a lower unemployment rate and higher cost of fuels.

Moving forward, the Rio de la Plata business segment, its EBITDA, measured in US dollar, decreased from $9.1 million to $6.8 million. Net sales, in US dollar terms, rose 3.8% this quarter in CCU Argentina operational segment, due to price increases partially compensated by lower sales volumes.

Price adjustments have allowed us to only partially compensate inflationary pressures.

As we mentioned in our previous press release, on August 7, 2013, the Extraordinary Shareholders' Meeting approved on June 18, 2013 a capital increase through the issuance of 51 million new shares of common stock.

We successfully closed our capital increase process, which subscribed close to 50 million new shares of common stock and raising almost CLP325 million. The subscription was about 98% of total offering and the remaining 2%, a little more than 1 million shares, will be subscribed through one or more auctions or remates.

As we informed to the market on November 5, 2013, the Board of Directors agreed that the mentioned remaining shares that were not subscribed within the (inaudible) period will be offered on the Santiago Stock Exchange on November 8, 2013 at a price according to the market, which in no case shall be lower than the price of the shares in the pre-emptive rights offering that was CLP6,500 per share.

The proceeds of the mentioned capital increase will be used to fund our expansion plan, which contemplates organic and inorganic growth. Looking ahead, we are confident that our operational excellence supported with the consistent branding efforts, will keep CCU on the path of healthy development.

As we stated in our two previous press releases, May 2 and August 7, 2013, in the future, on a date to be defined, releases will be disclosed Chile, Rio de la Plata and wine business segments only.

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

(Operator Instructions). Lauren Torres, HSBC.

I have two questions. The first question is on the higher expenses that you experienced in the quarter, whether it be distribution or selling expenses. Just curious if you have visibility over the next couple of quarters, if we should expect any of that to ease; if not, what the offset is and should we continue to see some margin pressure as a result of that?

And the second question relates to beer Chile. In your press release you said that there was a distribution build-up, and I assume that was because of new product launches. But I was curious if you think that affects your inventory levels, and we should see the reversal of that in the fourth quarter as some of your distributors are holding on to inventory? Thank you.

Thank you. As we mentioned in our press release, higher expenses are mainly related with higher distribution cost. And we are suffering pressure of higher cost of fuels on one hand; and on the other hand on higher, costs of labor works, and this will continue.

We are working on initiatives to reuse and improve, and make more efficient our distribution. And also expand our distribution, mainly in Chile; in the next [three] years we are going to almost double our distribution capability.

But on the short term we are going to continue suffering some pressures in there, because most of the issues, these are related with automatization of warehouses, and that will take some time to be implemented.

Related with the situation of the beer Chile division, our inventory were reduced, because of accounting treatment, but that affect our cost of goods sold. And this will not be reversed until we can recover the inventory level, and this will not going to happen until the end of the season. But you don't [accrue it] next March. So in the fourth quarter we are not going to have any positive effect related with debt; good news.

Okay, that's helpful. And if I could ask just one other question; you mentioned for the quarter the impact of lower sugar and I guess grape cost, but also higher malt cost. So I was just curious if there's any visibility too going forward that you could give us on how, if some of these ingredient costs are affecting you?

We are budgeting for next year, because of the sugar similar to the cost of sugar that we have right now; and also, the same -- pretty similar cost of malt for the next year.

We are suffering in the second half of the year higher cost of malt, because of the annual contract we have. But the next season we are predicting about the same, maintaining the same level that we have right now.

Okay, right, thank you.

Thank you.

Isabella Simonato, BofA Merrill Lynch.

I have two questions. The first one is if you could elaborate a little bit more how is the competitive environment in Chile for both beer and also soft drinks? And in that sense how's the recent innovations that you guys launched, they are performing?

And my second question is that, considering the higher costs in Chile that you mentioned, do you plan to another round of price increases to try to offset that? Those are the questions that I have, thank you.

Okay, thank you Isabella. The competitive environment in beer in Chile is unusual. We increased prices in last July, [in overall packaging] it was around 3% and the competitors after, 10 weeks of delay, followed that price increase. They maintained the discount in the brands that they discount at the same percentage.

And the promotion we consider they did -- and the market share in that category has been relatively stable in the last 18 months.

In the case of non-alcoholic, we have gained [10 points] of shares in the last three quarters. In that category we are price followers, and price has remained relatively calm.

And related with the innovation, we have been doing innovation for several quarters in the non-alcoholic position, a lot of innovation, and we're [going] to continue with that.

And in the case of beer, we started a review of the innovation program last year with the launching of Cristal Light and the launching of the 1.2 liter returnable packaging. And we continue this year with the introduction of a beer (inaudible) from very, very [deep], which is Escudo Negra; and more recently, an innovation in the premium with the introduction of a line extension for Royal Guard Black.

Some of them are performing pretty, pretty good. Some are -- we need to do some adjustment, in order to improve the situation in the next season, especially in the case of Cristal Light, the light flavor in Chile has not been very well accepted yet.

But the Escudo Negra introduction was a great success and the introduction of the 1.2 returnable liter also a very great success. Today about 70% of our returnable sales are done in that package. And we are [determined] to continue in our innovation next years.

And finally, related with the higher cost, as I mentioned, these are related with distribution, we are working on that, mainly on automatization, making more efficient our distribution center. Also, we are expanding or increasing the size of the distribution center all over in year one.

And also, working on the relation with third parties; we have about -- in the high season, about 1,300 to 1,500 trucks on the street; they're operated at -- several -- [by six] companies. And we are looking on changes and adjustments on that point, in order to make more efficient for both parties, for them and for us.

But this effect will be -- the effect of that change will [improve], when implemented and -- but it will take some time; we're not doing the short-term [ones].

Okay. Thank you. Can I just double check two numbers that I couldn't listen well? The first is, how many weeks competitors have followed your price increases, and how many bps of market share you gain on the non-alcoholic division?

Yes. In the case of price increases, usually our competitors take between, let's say, four to eight weeks to follow. So they -- when we announce the price increase, also there is a delay especially in the [non-trade] to pass this to consumer. So probably they will wait until they see that price to consumer has been increased into market. And after that, they wait some weeks, and follow us.

And your second question, excuse me? Market share in non-alcoholic category; according to our estimations, what we have based on [news] and our information, we have increased 1 point of share when we compare the third quarter of 2013 with the same quarter of 2012.

Great. Thank you very much.

You're welcome.

Alan Alanis, JPMorgan.

It's really a couple of questions regarding -- one of them is the trend of margins going forward. We saw this pressure on your cost of goods sold. I'm referring specifically to beer in Chile.

I was wondering how much are you putting also in terms of promotional activity or marketing, and so forth, in order to maintain this very favorable combination of increased volumes with increased prices year over year, going forward.

I know you've emphasized a lot about logistics and about labor costs, but are you also putting there more marketing, would be my first question?

My second question is a bit more strategic, if you have any update in terms -- or any changes regarding the deployment of capital in the near term, from -- for acquisitions, in terms of geographies, in terms of sizes, in terms of potential categories, any additional color, or the criteria remains the same as per your last roadshow? Those would be my two questions. Thank you, Ricardo.

Okay. Thank you, Alan. Yes, related with the marketing, of course, the launching of new packaging or launching of new line extension require more marketing support. And this will continue next year; will continue next year.

So our marketing price, especially in the beer division, will increase slightly. And for that reason, we do not like to do prediction of EBITDA margin for the coming quarter, but -- because of the reason I have mentioned to the previous question. On the one hand, that the improvement of inefficiencies in distribution, and the high marketing to support the new launches planned for next year, probably EBITDA margins will remain relatively flat, [because we mention that in] (inaudible).

And in terms of our M&A strategy, or capital, how we plan to enter new businesses or new markets, remain the same. Our priority is in the core businesses; that means beer and non-alcoholic, and moving from market -- new market, like Uruguay that we entered last year, (inaudible). And then, it could be Peru and Colombia. But they remain exactly the same as we mentioned during the (inaudible) period.

Yes, okay. Thank you so much.

Yes, thank you, Alan.

Armando Perez, Credit Suisse.

Two questions. The first one is, how much have you increased your proprietary (inaudible) bottle in Argentina, and how much of this is yet to come?

And my second question is, how do you see your portfolio of beer in Chile, in terms of how many price points do you think you can increase? And how far you can -- you think you can take it? And [the cost] of price differential, for example, of Escudo Negra and Royal Guard, versus Cristal and Escudo? Thanks.

Yes. In Argentina, as you know, we have invest recently a change in the packaging, because of the change in the [return on] packaging that will not be any more [ordinary] package, but it's going to be a proprietary package.

So that, in a three-year period, represents about $90 million of investment. Of this, about two-thirds has been done already. And we finance this through local debt at the FX interest rate, that is continuing, taking into consideration what is the actual [inflation] in Argentina.

Related with the price point in the beer Chile business, really how are [growth] portfolio and we cover most of the, if not all, the segments; super premium, premium, mainstream and discount brands.

And taking in consideration cost pressures we are suffering, mainly with distribution and new launch, supporting of new product or line expansion, that -- and launch all of them at a premium versus the equivalent.

We are planning for next year to do some price increases through the year, so that we could not comment when and how much they're going to be, because it's too early to talk about that.

Okay, thanks. What's the price differential of the new beers you launched, versus Escudo and Cristal, for example? Thanks.

Yes. We launched with, for instance, Escudo Negra with a 10% premium, versus the traditional Escudo. And the same until the Cristal Light with traditional Cristal, a slight premium versus the value brand.

Okay, thanks; very useful.

Alex Robarts, Citigroup.

I had two questions. And I perhaps want to just start over in Argentina. The 2.2% drop in volumes that you had in the quarter, could you talk a little bit about the industry? How is the beer industry evolving in Argentina?

Clearly, you are more of a price taker there, but I'm wondering if you could comment a little bit on your beer volumes were, versus the industry. And the activities that you're doing in that premium segment, if you feel that Argentina premium is growing faster or at equal rates to your mainstream portfolio. That would be very helpful.

The second question is back on the non-alcoholics. This has been a business that's been putting up very good results throughout the year. And on the market share comment that you gave us earlier, if you could give us a sense on the gains, in terms of the carbonated, versus the non-carbs; waters and nectars.

Who are you -- who do you feel like you're sourcing this share from? Do you feel like that's something that you want to keep on trying to do? Or would it be something that you would look to maybe look for more pricing?

And related to the non-alcoholics, how is the integration of Manantial? Clearly, this is a jug water business that operates at margin levels that are typically higher than we're used to seeing in other markets. So if you could comment a little bit also on how that integration is going on with you. Thanks very much.

Okay. Thank you, Alex. In the case of Argentina, the drop in volumes, we think, according to information that we have, is that it's an industry decline. We think that this also affects our competitors.

Nevertheless, we don't know exactly, because they do not release the information of that market standalone. So -- but the feeling is that the activity in Argentina have heard and what is going on in the country has affected volumes to all the industry, throughout the year.

In October, we had an increase of our sales, a modest increase of 1.6%. But this could be related, because October was the month of the election. We don't know if we're going to be able to maintain that growth in the coming months.

And this effect of lower activity that affects the industry affects mainly the mainstream. The premium is less affected. And in that segment, we launched at the beginning of the year, Amstel, that complements our portfolio with Heineken and other beer we have there. But the main effect is in the mainstream.

Related with the market share in the non-alcoholic operation, we have gained mainly in carbonated soft drinks through Pepsi. Of course, in the others, as we mentioned, we have very strong brands, and these, I can tell you, are growing faster than carbonated soft drinks. And there, also we have gained market share.

In the case of carbonated soft drinks, probably most of these gains was against big brands probably. But we don't know exactly. We don't have official information to confirm that.

In terms of pricing, nothing to comment; it's very difficult for us to predict what is going on, on pricing. Of course, what is happening to us, in terms of higher distribution costs, also affects our competitors. But because we are followers there, we could not comment if the market is going to pass these higher costs to consumers sooner or later. At the long term, of course, these need to be passed to the consumer.

In terms of the integration of Manantial, we are planning for January next year to start providing shared services to this operation. During the first year, we maintain this operation, operating standalone.

And the next step is we have learned how they do their distribution and if there is -- and how we could expand the distribution to some other products, to the (inaudible), to the office or to the home. But it's too early to comment on that.

But January 3, we are going to start to provide a shared service to the Manantial operation.

Okay. Thank you. Very helpful, thank you.

(Operator Instructions). Jose Yordan, Deutsche Bank.

I just had a question about the tax rate. There's been talk about the income tax rate going up in Chile next year, when the new government comes in.

And I just was wondering what the latest thinking is on this, or press speculation, or whatever you feel's going to be the case. And whether you feel they're also going to touch the excise taxes for beer?

Yes. Thank you, Jose. Well, as you know, Sunday, November 17 will be the election, and there are nine candidates. The one that is leading the pool is Michelle Bachelet, she is for the President.

And in her program it has a price -- she has a tax increase (inaudible) --.a reforming (inaudible). This tax reform includes an increase of taxes to corporate firm from 20% to 25% in the second period of the year. So, will be a gradual increase in taxes through a four or five-year period.

Also, in this reform, talk about excise taxes for alcohol beverage, and in -- about two Sundays ago, they published and communicated a program, the specific program. And this maintains the same declaration that they did in last June, prior to the primaries; maintaining the corporate tax rate increase and maintaining the excise tax increase for alcohol beverage.

There is actually a slight change in the [last]. When they announced in last June, they talked about a specific amount of pesos per liter of alcohol of 100% of alcohol. They mentioned that would be CLP8,000 per liter of 100% of alcohol. In the program that they announced on Sunday, October 26, they mentioned that they have considered, in the case of the excise tax, an increase to the average of the OECD countries. So it's more (inaudible) the number.

And when you calculate which is the average of the OECD countries, there are two figures. One is without Scandinavian countries, taking out the (inaudible) for this [excise] tax is too, too high. In that case, will be around CLP4,000 per liter of pure alcohol, instead of the CLP8,000 they communicate earlier. And if we include the Scandinavian countries, that will be in the range of CLP6,000.

So these are the numbers. It's lower than what was previously announced in June, but it's still the same significant increase in excise taxes, especially for the discount products or for the cheapest products. But for the more expensive products or the more premium products, that will be then less impact.

If this is translated to consumers, for instance, in the case of the cheapest price, that will be -- it should be, or could be, affected by a very high two-digit price increase to consumers, especially in the discount products.

In the case of the more premium products, this will be in the range of one-digit increase, or even could be, especially for the premium -- for the more premium products, could be a reduction in the price of(inaudible); which is a strange situation of this program, which is very aggressive, the tax. Because we'll charge more the consumer that consumes mainstream or discount price versus the one that is consuming premium or the super-premium product.

But what's the percentage increase on the mainstream, Ricardo, what would be the retail price effect?

The main thing is depending on the packaging; is returned or is one way, could be something in the range of 20% to 40%, a very, very, significant increase.

And remind us what the excise tax is today?

Today the excise tax today it's -- the excise tax today is at [value]; it's 15% for beer and wine. So we charge, depending on the -- 15% of the value of the product, and in the case of spirits, it's 27%. So this will move from that policy that charge at [value] to a policy that charge on a quantum of high-quality [liquor].

So we'll charge more wine than beer, because wine has more alcohol than beer. And we'll charge more the discount product, because there will be a specific amount of pesos per liter of alcohol content. So we'll charge more and the effect will be more in the mainstream and discount brands versus the premium and super premium.

And Bachelet, I take it, is still the front runner, so this is coming in one form or another.

Yes, Bachelet is leading the pool of the nine candidates. Probably, if she did not win in the first round, we'd go to the second one, fighting against Evelyn Matthei, which is from the center right. And she is not proposing tax reform. But Michelle Bachelet is proposing this tax reform.

So this -- we are going to -- the second round is in December. The new government start in March this year. So probably this tax reform, if Michelle Bachelet wins the election, which is the more likely scenario, will be presented to the Congress in this first half of the year. It will be discussed there. And we don't know if it's going to be approved, how it's -- after it's got presented, or it's not going to be approved.

Last time there was an initiative to increase excise taxes in Chile was in 2002, when the former President, Ricardo Lagos, was an [exercise], and the congress at that time did not approve this increase, because affect the production of -- affect a lot of people that live around this industry; the grape producer of the wine, and the grape producer of the spirit, all the (inaudible) in the chain etc., etc.; and so, taking into consideration the effect on that, at that time, was not good. But we don't know what is going to happen this time.

And maybe you can give us a quick rundown on what's happening on the soft drinks' side. No doubt all your candidates are reading the Mexican newspapers, or summaries of that. Of course, the soft-drink industry is really now under attack in Mexico.

And if you can remind us if it's just a VAT now, if I'm not mistaken, or it had a smaller excise tax for soft drinks, how might that change? Is it only on the alcoholic side?

No, this is only on the alcoholic side. The non-alcoholic products right now are charged with an excise tax of 15% of [value]. And there is no proposition to change that.

Okay. All right, thanks, Ricardo.

Thank you, Jose.

Isabel Darrigrandi, LarrainVial.

Well thanks for covering the excise tax question in Chile. I was wondering if you could discuss if there were any plans of doing anything similar in Argentina with the excise tax for beer.

No, in Argentina there is not any discussion on that, or not any change in the coming agenda. So the situation will remain as it is.

This is especially for Chile. As you know there has been, in general, in all the candidates, a priority for education. And to finance the education, some of them, and specifically Michelle Bachelet, are proposing a big public reform that affects the corporate tax, and excise tax, and also the elimination of the FUT. In the case of other candidates, they are trying to finance the funding of education with growth; in the case of Michelle Bachelet with more taxes. This is the situation.

Okay. Also, I had a question regarding Uruguay. Currently are you supplying Uruguay with beer produced from Argentina? Correct?

Yes.

And does that produce any problems with regards to being able to repatriate the earnings from Uruguay to Chile? How do you handle that situation with production coming from Argentina, if you export from Argentina to Uruguay?

No, you know that the situation, or the restriction, nowadays is to take money out of Argentina, not coming in another country. So the export there is not any restriction; the export to Uruguay and, of course, the Uruguayan operation paid this to Argentina operation.

And we are starting process of implementing our business in Uruguay, so for a while we are going to be negative, not replicating [still] from Uruguay. And Carlos went this morning, Uruguay, in order to introduce new product line and expand our operation there.

Okay, so you have --

But we don't know why there is not any restriction, or not any problem at all.

Yes, but your plan going forward is to supply Uruguay from your facilities in Argentina. You have no plans of building any production, or bottling plants, in Uruguay itself at this time for beer?

For beer, yes. For beer, we are going to continue supplying from Argentina, because the choice of that market does not justify to do an investment in Uruguay. So we will continue to supply from Argentina.

But in the case of the non-alcoholic operation where we have a water and carbonated soft drink operation there, we are planning to expand that operation.

Okay, great; thank you.

Okay, thank you very much.

(Operator Instructions). Alex Robarts, Citigroup.

Just a follow-up on the tax. Just to clarify, obviously you have to go through congressional debate it seems, and such, during the year. So this is going to be something that will follow. But is the concept to replace the current regime of VAT with the alcohol tax per liter? Or is it in addition to these 15% rates on beer and wine, and 27% rates on spirits? That was it, thanks.

Thank you, Alex. Our understanding is that this is a replacement of the current excise tax regime that is applying in Chile, at the moment. With this new regimen that is related with the alcohol content, and there will be a specific amount that is adjusted, according to inflation, but it is a fixed amount of alcohol content.

And the VAT, there is no discussion about any reform or adjustment in VAT. VAT will continue being under the regime we have, the 19% as it is right now. So consumer goods in Chile, all of them are charging with VAT, it is 19%, and there some products that are charging with the excise tax.

Some of these excise product are at the [value], as in the case of alcoholic products; on, also, non-alcoholic products in Chile. And some of these are related with a specific amount of pesos per liter, or pesos per gallon, like was the case in -- for fuels, for instance. And they are planning to move from [upper loading] to be (inaudible) for alcohol beverage.

So it will not be an addition on the current 15% of beer and wine, and 27% of spirits. It will be a replacement of that excise tax.

Okay. I got it. Thanks very much. That's helpful.

I am showing no further questions, I'd like to turn the call back over to Mr. Reyes for any closing remarks.

Thank you. In conclusion, we delivered a good third quarter 2013 top-line growth, as a consequence of higher volumes, coupled with higher average prices, mainly as a result of our consistent commercial execution, as well as the fresh innovation strategy.

As always you have our entire leadership commitment to capture sustainable long-term growth, and value creation in each of our businesses. And we keep our commitment to non-alcoholic growth as well.

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

Thank you. Ladies and gentlemen, this concludes our conference call for today. We'd like to thank you for your participation. And you may now disconnect.