Compania Cervecerias Unidas SA (CCU) 2015 Q1 法說會逐字稿

Good day and welcome to the CCU first quarter 2015 results conference call. Today's conference is being recorded. At this time I'd like to turn the call over to Cristobal Escobar. Please go ahead.

Thanks a lot. Good morning and thank you for attending CCU's first quarter 2015 conference call. Today with me are Patricio Jottar, Chief Executive Officer; Felipe Dubernet, Chief Financial Officer; and Matias Rojas, Financial Planning and IR Manager.

You have received a copy of the Company's consolidated first quarter 2015 results. Patricio will review our overall performance and we will then move on to a Q&A.

Before we begin please take note of our cautionary statement. Statements made in this call that relate to CCU's future performance or financial results are forward-looking statements which involve known and unknown risks and uncertainties that could cause actual performance and results to materially differ. This statement should be taken into conjunction with the additional information about risks and uncertainties set forth in CCU's annual report on Form 20-F filed with the US Securities and Exchange Commission and in the annual report submitted to the SVS and available on our webpage.

It's now my pleasure to introduce Patricio Jottar.

Thank you, Cristobal, and good morning everyone.

We are pleased with CCU's first quarter 2015 overall performance where consolidated EBITDA grew 19.8% with 103 basis points EBITDA margin expansion. These results are mainly explained by 14.3% net sales growth, where average prices increased 10% as we executed a series of price increases in our key categories coupled with a 3.9% consolidated volumes growth and market share gains across Chile and Rio de la Plata operating segments.

Margin expansion came also from the systematic search in all the areas of the Company for efficiencies through the successful execution of our Excelencia CCU program across all of our operations and the positive effect of some lower raw material prices.

All of the above more than compensated a harder macroeconomic scenario which slowed down internal consumption in our geographies and weaker currencies which impacted our margins.

The combined total negative effect of weaker currencies at a consolidated EBITDA level is CLP5.631b, or 147 basis points.

Chile operating segment EBITDA grew 21.4% with 212 basis points EBITDA margin improvement. Average prices raised 6.8% mainly due to price increases performed during Q1 2015 and the positive carryover from last year's price increases coupled with 4% volume growth with market share gains, as well as the delivery of efficiencies and some lower raw material prices, allowing us to more than compensate the challenging slowing down economic scenario with a 13% Chilean peso devaluation and the additional 3% average price adjustments due to higher excise taxes.

The Rio de la Plata operating segment delivered a 47.8% EBITDA growth and 210 basis points margin expansion.

Net sales increased 25.4% as average prices increased 21.2% in Chilean terms -- in Chilean pesos terms and volumes grew 3.4%, with positive volume growth across all geographies and market share gains in different categories. The operation showed good performance through successful new launches and an improving operation aligned to the efficiencies efforts regardless of the 14% Argentine peso devaluation against the US dollar and higher inflation.

In its 150th anniversary, our wine operating segment continued showing positive figures with 13.3% EBITDA growth. Export sales increased by 3.4% in US dollar terms due to a good execution on key strategic markets, while domestic sales increased 5.1% in Chilean terms -- in Chilean pesos terms, mainly due to price increases during the quarter.

Additionally, further tailwinds came from higher exchange rate and effective cost reductions, while headwinds were found on a higher cost of wine during the quarter as well as the average 3% price adjustments due to higher excise taxes in Chile last October.

This quarter, the before-mentioned Excelencia CCU program was able to deliver savings in marketing, revenue management, sales and distribution effectiveness, logistics, procurement and industrial areas. Targeted efficiencies are being accomplished and we look forward to continue executing them.

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

(Operator Instructions). Mauricio Serna, JPMorgan.

Hi. This is Mauricio Serna from JPMorgan. I would like to ask -- thank you for taking my question. I would like you to maybe give us a little bit more color on the market share gains that you mentioned in the Rio de la Plata and Chile divisions, like in which categories?

And also overall, what is your volume outlook? Do you expect to continue growing as you did in the first quarter?

And regarding the savings from your Excelencia program, do you believe these should be able to continue offsetting the USD COGS pressure? Thank you.

Regarding market share and volume and I'm going to answer your question and then I will ask Felipe to discuss about Excelencia CCU program.

Look, regarding market share, according Nielsen, here we have it. Okay, all together, if we add all the categories in Chile, which includes beer, non-alcoholic and liquors, if you put all together, we increased our total market share in the first quarter of 2015 compared with the whole year 2014 by 0.6%, or 60% of a 1 point of market share. This is all together.

If you double click this figure and go into details of different categories, in beer in Chile it was rather stable with almost 0.1%, or 10% of the market share, and we gained market share in non-alcoholic and also in spirits.

Regarding volumes, we had a good trend in -- actually this is the market share in Chile. In Rio de la Plata all together we increased our market share, particularly in beer in Argentina where we gained market share.

Regarding volumes, as you said, our volume trend was good in Q1 in spite of the weak macroeconomic scenario we are living in Chile and Argentina. Of course, as we speak I know perfectly how we closed in April and the trend of May. But, as you know, we prefer not to make looking forward statements regarding figures. We make just qualitative remarks regarding the future.

And, Felipe, why don't you answer regarding Excelencia CCU please.

Yes. So if we, although we don't give forward-looking, what I can say is that the exchange rate, as you mentioned, is always a risk in our P&L due to the US dollar exposure that we have in our costs. So far we are very happy with the delivery of the Excelencia CCU program in all the pillars covering from commercial areas to industrial, logistics and procurement where, as you mentioned, we were able to offset the negative currency movement in our P&L.

Forward-looking, always there is a risk in terms of both the exchange rate and also the implementation of some of the projects that the program has considered for this year. So we, as it's impossible to forecast the exchange rate, especially in geographies like Argentina, it's difficult to answer your question straightforwardly saying if we will be able or not to compensate any fluctuation on exchange rates. But, we are making all the efforts in our efficiency program in order to protect more our P&L and deliver sustainable efficiencies for the business.

Okay, okay. I understand. But do you have per se like a target for savings?

Yes, of course. We have a target in for 2015 month-to-month and we also have a three-year target which is an important amount of efficiencies and we are just beginning and, of course, we are going to put all our focus and efforts in order to make it happen.

Okay, okay, and also if you could maybe just tell us a little bit how's the performance of your JV in Colombia going?

It's just beginning. As you know Mauricio, we are going to build a new brewery and we expect it to be ready to produce in 2017, the middle of 2017. And before that, we are just importing and selling Heineken and we began at the end of March doing that. So we have been selling imported Heineken for a month and in a few words, we are keeping the volumes that the distributors of Heineken used to have with us. So it's too early to make a conclusion. But the long-term vision of our project in Colombia is exactly the same one when we decided to make the joint venture.

Okay. Thank you very much. Congratulations.

Thank you.

Alex Robarts, Citigroup.

Alex Robarts at Citi. Hi, everybody. I was keen to go into two areas. One, the volume and pricing outlook in Chile and then, secondly, I was hoping we could get a little bit more color on the CapEx with the plant in Chile and that investment as well.

So, when we think about this 4% number that was put up for volume growth in the first quarter, is it safe to assume that probably the biggest piece of that growth was in soft drinks as opposed to beer and liquors? And if that is true, how much is the non-carbonated segment really pushing and driving the ECUSA growth? Do you feel within that soft drink non-alcoholic category you've also gained share? You've talked about, I guess, 60 basis points of share in Chile in the first quarter.

And how should we think about the premium beer segment going forward? I know you've done a good job with the Royal Guard campaign in at least checking the growth of the Corona brand. Do you feel like you have a chance to further gain share within the premium beer segment?

So if you could comment on those. I know there are a couple of questions inside that one but and then my second question is on the ECUSA CapEx project, but I'll wait and see what you can comment on the volume. Thank you.

Thank you, Alex, for your question. I will discuss on market share and volumes and then I will ask Felipe to discuss on CapEx.

Look, if you had asked me at the beginning of the quarter about the expected volumes for the quarter, to be honest, I wouldn't have said that they were going to grow 4% because number one, our economies are not growing and number two our prices are high. We increased prices in all categories during January and February, and in some cases in March when, on one hand, and on the other hand because of excise taxes being in place in October 1, 2014 we were obliged to increase prices to consumers by 3.5%, roughly speaking, in the different categories without capturing this money in our P&L. And so price to consumers are much higher in Q first in the different categories than they used to in Q first 2014.

But, in spite of that, we grew our volumes. And the trend in April and May that mentioned before, I mean I mentioned before that I have the data but I cannot looking forward statements, but I could say to you that we've got good results also in terms of volume in April and May.

I mean it's not matter of temperature. Here you have the average temperature of -- in Santiago being Q first 2015 it was a little bit more than in Q first 2014, 20.9 Celsius degrees as an average compared with 19.9 Celsius degrees. This is 1 point more in terms of temperature. But the temperature in 2012 was 21 and it 2013 was 20.2. So temperature was not a key issue.

But we think that's what happened is the following. The unemployment rate has dipped a little bit, but not too much. This is number one. Number two, real salaries are still growing a little bit. Number three, the consumption of -- the total amount of loans have by consumers in order to buy durable goods have decreased a little bit. And we think that in a moment like this, people decide to buy a beer, to buy a soft drink, to buy a liquor because it's a very cheap way to, I mean to be happy, let me say in these words. So we're really happy and comfortable on the volume trend.

Regarding market share. As I mentioned before, we're still gaining market share in the non-alcoholic side of the business, particularly because the Cola segment where our market share is the lowest is not growing. It's stable, or decreasing a little bit, and all the other categories, soft drinks non-Cola and all the non-carbonated categories are growing a lot. And our combined market share in all the non-Cola categories is more than 50%, it's 52%, 53%. So, mathematically, when these segments grow more than the Cola segment, we gain market share. And I think that we have been in this trend for many years and we expect this to continue happening in the future.

Regarding beer, as we mentioned before, our market share was almost stable. We increased a little bit, 0.1%, and after losing a lot of market share in the last decade, we have been able to keep our market share roughly constant in the last, let's say, 14, 16, 17 months and we are very comfortable on this. And our market share has been rather constant or stable both in the mainstream categories and also in the premium categories.

Our competitor Cerveceria Chile or InBev is gaining market share but mainly because they are bringing Corona to their portfolio. But when you add -- but when you compare the pro forma, their market share it's stable also.

And it's difficult to say what's going to happen in the future. But, as you know we have been putting a lot of effort in all the elements to keep our market share because we consider it unacceptable the amount of market share that we have lost in the last decade.

So good morning, Alex. So regarding your question regarding the CapEx for non-alcoholic I think was your question, we are still, it's still in the plan to start the construction of the plant in 2016. And this has been reflected in the CapEx numbers we submitted in the 20-F forms that this available to you.

We are, the status of the project, as of last year we bought the land to secure the industrial expansion of the Company in Santiago. And now we are working in the environmental license details to be presented in the short-term to the authorities. So it is still in the plan.

It's good to say also that we have been after, because of our volume performance in the non-alcoholic categories, we are increasing a lot the efficiency in current lines and current plants in order to fulfil all the volume growth that we are having, especially in the non-carbonated as Patricio said.

Okay. Okay got it. Thanks very much. But just to clarify on the ECUSA plant, on the new plant, is it safe to assume that production from the new ECUSA plant starts at the end of 2016 or should we think about product coming out of that new plant for 2017?

2017.

Okay, okay. Very helpful. Thank you.

It's 2017. And Alex we are going to begin little by little. In fact, we are not going to build up a huge plant in the very beginning and to occupy it by 10% or 15% because it's too inefficient. We are going to design a long-term plan for the next 30 years. But we are going -- but our plan is to install, I mean we are fine-tuning on this, but probably two or three lines in the very beginning and we'll increase the square meters of the plant and we'll install new lines as we need them in order to avoid huge CapEx and a huge amount of depreciation.

Got it. Got it. Very helpful. Thank you.

Thank you.

Luca Cipiccia, Goldman Sachs.

Hello?

Thank you questioner, if you heard the voice prompt your line is open.

Hi. Sorry. This is Luca Cipiccia from Goldman Sachs. I wanted to ask a question on the profitability, just to maybe frame part of the discussion or the answer you already gave. But where do we stand in the turnaround process in terms of timeline? Would you say you've been through half, more than half, less than half? Just to understand, when we look at the margin recovery that you posted in Q1 it was solid. Your profitability is still significantly below maybe where we were a while back. So it may be helpful to understand how should we think of that going forward in terms of higher investments that may be structural in supporting the market share and supporting the brand. But at the same time what are you going to be able to recover and possibly even amplify given efficiency initiatives that you are putting in place and where do we stand in that process from a timeline perspective?

Thank you, Luca, for your question. As you have participated in most or in all, I don't remember, of our conference calls in 2014 you should remember that we were very concerned on the erosion of our margins --

Yes.

And we mentioned many times that we are very committed on recovering margins. And in order to recover margins you need many things. You need number one, volume, number two, prices, and number three, efficiency. And we're working in the three dimensions, in volumes and price and efficiencies. We are happy to have recovered a little bit, or more than a little bit. We are happy to have recovered and to have changed our trend in Q first 2015. But this is just the beginning. We are going to put all our focus in order to make it.

Of course, we have formal internal predictions in each one of these dimensions and we have our plans for the future. But, as you know, we cannot discuss it on quantitative terms, but definitely we are just in the beginning of the process.

Okay. I understand. Maybe just on the efficiency front, on the changes that you are implementing, maybe if you could share a bit more of how many low hanging fruit, if you like, are still there, how many initiatives incrementally you may be putting in place just directionally to get a sense of how further profitability can recover?

We have low hanging fruit and in fact we are capturing them. As you know, we hired the services of McKinsey in the second half of 2014 and they gave us, I would say, two good news. The first good news is that the total amount of employees of the Company was the right amount of employees for the kind of operations we have and for our volumes and for our operations. So we are not reducing employees. I mean, of course, small restructures here and there happen all the time, but we are not making something huge regarding employees. That was good news number one.

And good news number two is that we have a lot of opportunities in many dimensions, and particularly in six dimensions that I mentioned in my introduction at the beginning of the call

We have opportunities to save money on marketing, spending less money than we spent but capturing the same results. We have opportunities in revenue management, particularly in discounts where we have the opportunity to cut the discounts here and there without making our volumes to suffer.

We have opportunities in sales by capturing more opportunities that we are capturing today, not by reducing. Of course, we have a lot of opportunities in distribution effectiveness by rationalizing our service and by making a lot of efficiencies in our distribution centers.

In procurement by being much more professional in negotiating each one of the contracts of the Company from $1 through to a lot of dollars.

And finally in our industrial areas where we are optimizing the utilization of our equipment and decreasing the CapEx.

But we had, I would say that we had discovered most of these opportunities before McKinsey came to CCU. But McKinsey, of course, discovered other opportunities. But they pushed us to put focus on that.

As you know, Chile and Argentina grew at a very good rate our economies in the last 10 years and we put probably most of our focus on increasing volumes and margins, and there is margins, more than putting our focus on efficiency. And we are changing dramatically our mind since the second half of 2014 and particularly in 2015. And it's a lot of money to capture. I have to say that I regret not to have done this before but we are doing this now with a lot of focus.

And you're acting now on all the recommendations, or this is going to be more of a staged, let's say, action? Of the ones that you've mentioned, are the processes all in place to go after these new opportunities, or you're going to follow some kind of timeline or sequence or priority?

Yes. We have a timeline for two reasons -- for two reasons. Number one, because to implement many things at the same time it could be risky because it's difficult sometimes to read the interactions between one plan and another. And, secondly, because in some cases we need to make some, let's say, structural changes and other changes, some cultural change and it takes time.

So our whole plan is a three-year plan. But after the three-year plan, we are going to keep the focus on efficiency forever. I mean these I would say are really changes on the way we see the business. We are going to put the same effort on keeping and growing our market shares and our categories as we're going to put on efficiencies.

Perfect. Okay. Thank you. Thank you very much.

Thank you.

(Operator Instructions). Ignacio (inaudible) from JPMorgan.

Hi. Ignacio (inaudible), from JPMorgan. I have a question regarding what your pricing strategy is going to be going forward this year and if you see that competitors will follow in price increases if you do so?

Thank you, Ignacio, for your question. In some categories where we lead, we usually take the decision to increase price regardless what our competitors do. In other categories we are followers because, for example in soft drinks, in Pepsi we don't dare to increase the price of Pepsi if Coca-Cola doesn't increase their prices. We are followers.

Having said that, we have -- having said that, we -- as I mentioned before, we have the intention to optimize our price at our discretion and we are doing a lot of [credit margin]. We have done it for many years, but we are putting much more emphasis on, much more emphasis on this.

We think that the Chilean and the Argentine consumers are willing to pay more for premium brands than for -- and they feel a little bit disappointed when you don't price correctly a product. They think that to sell your product at a cheap price is not a good idea in our markets and we are going to capture all the opportunities coming from this. Of course, I cannot tell you exactly what we're going to do because we don't know what we are going to regarding prices. I mean we are going to capture the opportunities as they come. But we are very open on that sense.

Okay. Thanks.

Antonio Gonzalez, Credit Suisse.

Good morning. This is Antonio Gonzalez from Credit Suisse. Thanks for taking my question, Patricio and Felipe. Just a quick follow up.

You've made obviously a lot of references to this efficiency program. Could you just give us some additional details on whether this has also changed the compensation structure of the top management of CCU? This is obviously a big cultural shift apparently that you're going through and I just wanted to ask if there were some specific metrics that are reflected in compensation, whether you capture, whatever the number is on a three-year basis, whether that impacts compensation of top executives or not?

And if you can just remind me how much of the compensation today is fixed, how much is variable and how much is in the form of cash and how much in the form of shares. Any comment that you can give in that respect would be very helpful. Thank you.

Thank you, Antonio, for your question. The answer is yes. In the bonuses for 2015 to be paid in January 2016 we are considering our Excelencia CCU plan and we have to capture a huge percentage of the Excelencia CCU plan which is in our budget and if we don't capture this, bonuses are going to be zero regardless the final result of the day. If our budget is 100 and we make 110, but we don't capture the efficiencies, and we have a PMO which is measuring the efficiencies, bonuses are not going to be paid. On the other hand, if we capture the efficiencies but if we don't capture the 100, bonuses are not going to be paid. So we need both conditions in order to pay bonus and this is a change in our bonus system beginning of 2015.

Regarding variable, I mean it depends on many things. But a typical manager of CCU receives five to six months in bonuses if we make up our goals. And it could be two times this if we make our goals, if make much better than our goals and zero if we don't make them. And this is paid 100% in cash, no shares.

All right. Thank you on that. How low does it go in the organization? How many managers are subject to this variable compensation structure?

In CCU we have 7,700 employees in our -- in all -- in our six countries and all the countries where we participate, in those operations where we consolidate, and managers receiving this -- the kind of compensation I just mentioned are 100.

100?

100. Having said that, I would say that 100% of the employees of CCU, with no exception, receive a kind of variable system. But what I just described is a system for the managers which are 100. But the other 7,600 employees, all of them receive variable salaries which have relation with their performance. So the whole organization is aligned behind this.

Got it. Thank you so much for the details and congratulations. This seems like a really important change.

Thank you very much.

And at this time there are no other questions in the queue.

Okay. I would like to say some closing remarks. First of all, I would like to say that we regret the natural disaster occurred in the northern regions of Chile during March, where several towns were affected by large floods and mudflows. Engaged with the community, our subsidiary ECUSA donated significant amounts of water and soft drinks to the affected regions. We keep our commitment to support all those affected regions and the people within them.

We've strengthened, at the same time, our commitment and raise our efforts to reach sustainable operational and commercial excellence through the delivery of efficiencies, the quality of our products, the preference of our brands and our market position while structuring ourselves in a way that allows us to operate our regional strategy with the highest added-value in all of the six geographies in which we participate.

Thank you very much.

And that does conclude today's teleconference. We appreciate your participation.