Compania Cervecerias Unidas SA (CCU) 2015 Q2 法說會逐字稿

Good day and welcome to the CCU Q2 2015 results conference call.

This conference is being recorded.

Now at this time, I'll turn the conference over to your host, Matias Rojas. Please go ahead.

Good morning, and thank you for attending CCU's second quarter 2015 conference call. Today with me are Patricio Jottar, Chief Executive Officer, and Felipe Dubernet, Chief Financial Officer.

You have received a copy of the Company's consolidated second quarter 2015 results. Patricio will review our overall performance, and we will move to 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 or results to materially differ. These statements should be taken in conjunction with 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 web page.

It is now my pleasure to introduce our CEO, Patricio Jottar.

Thank you, Matias, and good morning, everyone.

We are very pleased with CCU's second quarter 2015 results. When excluding the extraordinary one-time effect compensation received by our Argentine subsidiary, CICSA, during Q2 2014 for the termination of the contract which allowed us to import and distribute on an exclusive basis Corona and Negra Modelo beers in Argentina and to produce and distribute Budweiser beer in Uruguay, the consolidated EBITDA increased 51% and net income increased by 65.7%, mainly due to a top line growth of 17.9% driven by 8.6% growth in volumes and average prices, as well as the continuous generation of efficiencies through our ExCCelencia CCU program.

Considering the previously mentioned compensation, consolidated EBITDA decreased 3.6%, with an EBITDA margin of 16.2%, and net income decreased 21%.

Overall, we were able to keep rather stable market share regarding volume and increasing market share regarding value.

The Chile operating segment's EBITDA grew 46.3%, with an EBITDA margin improvement of 491 basis points.

A 12.8% top line growth was delivered as a consequence of 8.1% higher volumes and 4.4% higher average prices.

The effective marketing and execution in the points of sales and the Copa America Championship activation, where we sponsor the Chilean national team, helped us to capitalize the benefits from an exceptional industry growth, partially influenced by good weather conditions.

Efficiency gains and some lower raw material costs more than compensated the negative effect of the Chilean peso devaluation in the quarter.

The Rio de la Plata operating segment's EBITDA decreased to negative CLP62 million, from CLP13,087 million. Excluding the positive one-time effect of the above-mentioned compensation in Argentina and Uruguay, the EBITDA increased by CLP5,733 million, being much higher than in Q2 2014, mainly driven by 31.4% higher average prices in Chilean pesos terms and 12.7% increase in volumes.

Efficiencies contributed as well to decrease MSD&A and cost of sales as a percentage of sales.

The wine operating segment keeps showing positive results. A 5.4% top line growth contributed to an EBITDA margin of 19.1% and an EBITDA of CLP8,911 million. Nevertheless, this figure is 1.7% lower than the one reported in Q2 2014.

These results are mainly explained by higher cost of wine due to the 2014 harvest, the 24% devaluation of the euro against the US dollar, and the strong competitive environment; all these effects partially compensated by efficiencies.

It's important to mention that in spite of the compensation received in Q2 2014, the consolidated EBITDA for the first half of the year increased 10%, totaling CLP136,884 million. Excluding the above-mentioned, one-time effect compensation, the EBITDA increased by 29.6%.

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

(Operator Instructions) We do ask that you state your name and your company name prior to posing your question.

This is Andrea Teixeira, from J.P. Morgan. So, just curious to see how you're seeing things into the third quarter? We understand that obviously you had a very good tailwind. You executed obviously really, really well. It's not only Copa America. But if you can -- ? And you've been doing tremendously since the beginning of the year.

So, if you can give us some -- without obviously giving much detail, but just as a trend, if you are seeing the same similar trends into the third quarter for volumes?

And also, if we might be seeing, given the FX, the impacts being higher on the COGS in this quarter?

I will discuss on volumes, and then I will ask Felipe to discuss on cost of goods sold.

It's true that volumes in Q2 were amazingly high. In Chile, we increased the volumes by 8.1%, with (technical difficulty) almost flat or not growing. And our market share in terms of volumes were rather stable, as I said. So, all together, [this is more related to] the industry than with our market share.

Of course, the Copa America soccer championship helped a lot, but the most important effect, as I mentioned in my introduction, was weather. Here, I have the figures. Here, I have Q2. Average temperature -- this is the average of the maximum temperatures, because we have discovered that more than the average temperature of the day is the maximum temperature of the day, which is the real element which trigger higher volumes.

And the average of the maximum temperatures of the day in Q2 2014 was 19.1 degrees Celsius. And the same figure in Q2 2015 was 22 -- 22 compared with 19.1. Three more degrees, which is a lot. If you consider previous years -- I'm going to read you temperatures in Q2 from 2010 to 2014: 19.5, 19.8, 20.2, 19.8, 19.1. Very stable. And this year, they jumped three degrees, which is a lot. So, it's important to take this into consideration.

Having said that, we have the impression that the industries are performing better than the economy. We have an explanation on that. The consumption of durable goods -- houses, refrigerators, cars, et cetera -- have been decreasing because people are not feeling so comfortable or confident on the future.

They decide to postpone this kind of consumption. And when it happens, the consumption of our products are there to capture those savings, on one hand.

And on the other hand, the unemployment rate in Chile has not increased. The number of people employed is rather stable. The public sector has been supporting this figure, but at the end of the day the number of people receiving a salary at the end of the day is being a little bit stable, or growing a little bit.

And real salaries are growing. Salaries are growing 2% more than inflation.

So, under those conditions, we don't expect volumes to be poor in the second half of the year, but of course not as good as in Q2 because of the temperature effect that I just explained, Andrea.

Okay.

Regarding your question regarding exchange rate -- Andrea, good afternoon -- obviously, the volatility of exchange rate affect our raw material cost, but also our transportation cost, as oil is an important component of the cost structure of transportation.

It is difficult to predict how much would be the upcoming effect of the last movement of the Chilean pesos where the Chilean pesos went above 680.

Of course, a movement of CLP1 in the exchange rate of the value of the dollar in Chile affects our EBITDA level up more or less CLP170 million in an annual basis. However, as I told you, it's difficult to predict as the levels of inventory you can carry of some raw materials and also the impact of the mitigations we have in place such as efficiencies, and also we are seeing lower raw material costs.

But certainly, we will have a tougher scenario for the second half of the year, given the volatility of the Chilean pesos nowadays and of course what could happen in Argentina by the end of the year, after the elections.

So, Felipe, just to summarize, you're still seeing margin improvements -- right? -- from last year, but the magnitude may not be as high as we've seen in the beginning of the year. You had a really good uptick on profitability in the first half. So, maybe not as much, right? Is that a good way to read it?

Probably, Andrea. Probably you are right in your assumption, but it's difficult to give you an exact prediction on that. But it's probably what you are saying.

Okay.

It's Alex Robarts, at Citi. Let me go into two specific topics.

First is really on this efficiency program that you've implemented starting in January. I guess fruits from the McKinsey Consulting and other projects. But it seemed to be really having an impact on margins. Can you tell us how that -- I guess you've called it the ExCCelencia CCU -- how did that help in Chile in the second quarter? Were you happy with some of the OpEx results there? And how do you see the efficiency gains in the second half of the year?

So, that's kind of the first question around the Chile efficiencies.

And I guess the second thing we were interested in knowing is really the short-term outlook in Argentina. Clearly, the election is coming up in October, but you had very strong growth in the second quarter in Argentina beer. Could you tell us what was the magnitude of the growth? It seemed like there was some market share gains helped by Schneider. And do you think the conditions of lower inflation, public works projects, and such can help continue to drive beer consumption and demand into the third quarter?

So, those would be the two questions from us.

I will address the two questions.

Regarding the ExCCelencia CCU plan, which is the name of our plan to capture efficiencies, as I mentioned in the last conference call it has six dimensions. We are working on six dimensions after the McKinsey support -- number one, in marketing; number two, in revenue management; number three, in sales; number four, in logistics; number five, in procurement; and number six, in industrial areas.

And we have identified a lot of opportunities to capture efficiencies. Some of them are more easy or easy to capture, which are those which are capturing in 2015. But this is a long-term plan. We are going to be capturing efficiencies in 2015, 2016, 2017, and eventually 2018. It's a long-term plan, and it's extremely ambitious in terms of all the efficiencies we are going to capture.

Let me give you some color on the amount of efficiencies we captured in the first half of the year and what we expect for the second half of the year.

Let me build the EBITDA in the first half of the year. The EBITDA in 2014, the first half, was CLP124 billion. Excluding, or factoring out, the Corona effect, the EBITDA was CLP105 billion. We have to deduct on that the negative effect of exchange rate and add the positive effect on commodities; but altogether, a negative effect on CLP6 billion.

So, CLP105 billion minus CLP6 billion is CLP99 billion. So, our base EBITDA for 2014 -- adjusted by Corona, by exchange rates, and by commodity effects -- is, let's say, CLP100 billion.

And our real EBITDA this year without any extraordinary effects is CLP136 billion. So, we increased EBITDA, adjusted by these effects, by CLP36 billion.

Roughly speaking -- and this is true for the first half of the year and also it's true for Q2 -- half of it is efficiencies and half of it is business growth. And we expect to continue delivering in terms of efficiencies and business growth for the future.

Regarding your second question, in Argentina also weather conditions were particularly good in Q2 2015, and the industry expanded a lot. And we benefit from that. But at the same time, we gained market share, and this is the reason why we saw our volumes importantly.

What is going to happen in the second half of the year? We don't know what is going to happen with the weather, but we think that we are gaining a little bit of market share and it's going to help. And same thing then in Chile.

We think that in periods where the economy is not performing very well -- and this is the case of Argentina -- our industries don't suffer. A lot of people substitutes consumption of cars by consumptions on beer and beverage.

So, we keep both in Chile and Argentina a little bit optimistic on our volumes, on one hand, and on our ability to capture efficiencies on the other. Probably not as much as Q2, as Felipe answered to Andrea before, but we are optimistic.

Very helpful. The just clarification, is it safe to say then that in Argentina in the second quarter the beer volumes were double digit? Did they get that high?

And I guess, just to kind of understand the Schneider marketing effect, do you feel like there has been a new level of -- when you look at your brand equity indicators are top of mind? Do you feel like Schneider has been a key part of the market share gain? Or, have you seen it along more spread around the premium and the other regional brands? Any color would be helpful on that.

Well, as you know, we make public the volume growth of Rio de la Plata, where we grew 12.7%. But Argentina is most of the volumes of Rio de la Plata -- 80%. So, it's fair to say that we also grew double digit in Argentina, and it's fair to say that we grew double digits in Schneider.

And we're very happy on that, because this is our most important -- it's our most strategic brand in the portfolio.

Okay. Finally, just one clarification. I know you mentioned what specifically is the impact on annual EBITDA from the currency movement on the Chilean peso. Could you just repeat that number -- I'm not sure if I got it right -- if you wouldn't mind?

In the first half of the year, the effect of the devaluation in Chile was CLP8.3 billion negative.

Okay. So, six months EBITDA.

On EBITDA. Exactly. On EBITDA basis. Minus CLP8.3 billion. In the case of Argentina, it was very small -- minus CLP0.2 billion. And we have a positive commodity effect on CLP2 billion.

So, what I mentioned before is that the combined effect of devaluations in Chile and Argentina, where the devaluation effect was negative and the commodity effect was positive, was minus CLP6.4 billion.

Got it. Got it. Super.

This is Luca Cipiccia, from Goldman Sachs. I have a follow-up on some of the explanation that you gave, some of the discussion of cost savings and improvement in margin.

It was very clear when you gave us the breakdown between the organic improvement this year versus last year. But of those half that you said came from efficiency gains, I was hoping maybe can you -- how much of that is on procurement? How much of that is gross margin? In other words, how much of that is actually savings that you're finding throughout operating expenses, distribution? I don't know if you can give additional indication on where these improvements are coming from.

That would be my first question.

And the second, just a small one, on an update on CapEx, as well, because I understand that was another part of the revamp in many ways, as well as on the progress in Colombia? That would be great.

I will discuss about costs and about Colombia, then Felipe will discuss on CapEx.

We have decided not to make public the breakdown of our efficiencies. But I could tell you two things. Number one, we are getting efficiencies from all that I mentioned, from the six dimensions. This is number one.

Number two, (inaudible) criteria at the time of taking the efficiencies is not to lose our commercial capacities or capabilities. And if it cause to reduce marketing expenses and to lose market share, it's not a real efficiency. It's a bad decision. I would never do that.

So, we are capturing efficiencies and improving our processes, on improving the way we do things, but without losing [masses] to compete. This is number two.

Number three, we are making a big effort -- and we think that we are doing well on that aspect -- to make our savings and our efficiencies sustainable, because if you create efficiencies but you don't create a change of processes in order to make those efficiencies sustainable, you're going to capture them from one year, two years. But then, you are going to increase your cost again.

And all the program that we are putting in place-- we are creating a special PMO and we have a lot of people working on that -- are related with creating processes in order to make the savings sustainable.

So, if this year we save "x" or 100 -- 100 is an index; it's not a figure -- we expect next year to repeat this 100 and to capture another amount of efficiencies. Same thing for 2017. Same thing for 2018. This is regarding [savings].

Regarding Colombia, you know the real battle, or the real game, is going to begin in the second half of 2015, where we are going to be ready to locally produce. In the meanwhile, we are importing Heineken from the Netherlands and we are beginning to distribute Heineken.

The only thing I could tell you is that of course we are selling more Heineken than our old distributors, and we are growing the volumes of Heineken and at the same time the price of Heineken. But this is not the real game, even if it's going to be an important brand in our portfolio and we are very committed on growing volume and brand equity of Heineken.

And at the same time, we are doing all the procedures, permissions, and authorizations, and architecture, and engineering regarding the brewery, and we are on schedule on that.

And please, Felipe, why don't you discuss CapEx?

Regarding organic CapEx, I would say we have still the same projection that we made public in our last 20-F report. As you know, we publish an estimate of commitments of CapEx for the next following years.

So, overall for 2015, the projected commitment was something roughly CLP220 billion, which is something like $340 million. Of this, it's real CapEx in terms of cash flow and 80% of this figure. We do not have [any], but we will make the new projection in next 20-F report next year. I would say we are on track in the capital expending, as you could notice in our last financial report.

For the next following years, we maintain our projection in organic CapEx. That does include a new non-alcoholic plant in the Santiago area. That, we are working in presenting the environmental license this year. This plant should be operative end of 2018, given our efficiency projection of current capacity and volume.

So, in general terms, we maintain the projection, Luca.

This does not include the investment in the new joint venture in Colombia.

Okay. Perfect.

I have two questions. Number one, going back to Chile a little bit, you mentioned that your market share in terms of volumes was stable during the quarter. I was just wondering how that compares if you break down the market share between the beer and the non-alcoholic divisions? So, in the end of the day, wanting to understand a little bit more, especially in the beer division, how much your competitive environment has changed this quarter compared to the previous years?

So, that would be the first question.

And the second question is more thinking long term. The Chilean division has seen a lot of margin volatility in the last years. We saw that margin coming off from high 20%s to around 20% last year. This year, you guys are showing an impressive improvement.

So, just wondering -- considering the competitive environment, the pricing, the efficiency gains that you've been delivering -- where you see effective this margin going in the medium term, over the next one, two, three years? What you consider to be the normalized margin considering the market landscape as it is right now?

Thank you. You didn't mention your name?

Sorry about that. It's Thiago Duarte, from BTG Pactual.

Regarding market share category per category, as you know we manage the Chilean operation as one operation, and the stomach of the consumer for us is one stomach and we fill the stomach with mineral water, the wine, beer, soft drinks, pisco, et cetera, et cetera. And this is the real way we run the business, and we prefer to see the total market share on volumes and on value.

And I could say that on value we have been increasing our market share; and on volume, rather stable. But in fact, we have also increased our market share on volume a little bit. But let's say stable, because the growth was very marginal, and in the case of value, it was a little bit more.

We have some quarters where we grow our market share a little bit more in soft drinks, some quarters where we grow our market share a little bit more in beer, some quarters where we lose a little bit of market share in one category on the other. But when we say that market share has been rather stable in volumes and growing in value as a trend, we are meaning that this is what is happening in our core categories.

But we have decided not to open information category on category, because it is not really as we see the business.

Regarding margins, Thiago, I would say that it's true. We have had volatility, and you are right. Impossible to say no, what you are saying. But I would say that 2014 was [a strange] year. And if you eliminate 2014, our margins has been much more stable.

And many things happened in 2014. I duly explained those factors a year ago when those results were happening. But we recovered margins, and we expect not to have too much volatility in the future.

And of course we are going to make our best effort in order to increase margins, particularly on the ExCCelencia CCU plan, which is our plan for efficiencies which has been doing very well, as I mentioned before, and where we are putting a lot of focus and personally are spending a lot of time and energy on doing it happen.

Okay. I think that's helpful.

(Operator Instructions)

It's Jose Yordan, at Deutsche. Well, my main question was asked. But I was curious as to if you could give us any color as to what your malt contract in dollars was for this year? If I remember correctly, you were renegotiating those around May. And were you able to get finally the full impact of the recent declines in grain costs, et cetera?

And I guess interested also in what you're doing with sugar? Almost surely you've been getting a big benefit from sugar. But interested in how much you're hedging that into the future, given the current, I think, seven-year lows, or something like that, in sugar costs? Did you get more aggressive about hedging this at this point?

I would like Felipe to discuss your question.

So, I would start by the sugar. That was your last point. As you know, we don't play with futures. We don't hedge our [flows]. So, at the end, sugar, what we do have is a normal operation inventory policy. Usually, we carry out an inventory between two to four months of sugar. And we stick absolutely to that policy.

Of course, in our results, as Patricio mentioned, we have a positive effect in the first semester of lower raw material cost, and one of these raw materials is sugar.

Regarding malt, yes, we are in the normal process of renegotiating contracting in malt.

Regarding the grain costs, these costs -- actually, the inventory depletion is much slower than in sugar, because it's more seasonal stock, because our main is more -- the input cost you have in our P&L is more related of barley harvested last year, not this year. Because at the end, we have a more long position in terms of inventory in malt, because we work with long-term contracts and not spot prices there.

But is it fair to say that you're seeing --? Because grain costs have been lower for over a year now.

Absolutely. Absolutely. And will continue to be low, as the trends we are seeing on wheat prices, corn prices. But at the end, how you see this reflected in the bottom line is much slower than what you see reflected in the case of sugar. And this is due to inventories.

Okay. And if I can just follow up with one? When you bought the land for the new plant last year, there was some doubt as to the speed of building this new plant, depending on where volumes would go, et cetera. And of course, when you bought the land they had just passed the tax increases in Chile, et cetera. And I think you had been more of the view that there would be some delay in beginning to build this plant, et cetera. Has that changed at all, in light of the big difference in volumes that you've been producing lately?

The answer is the following. We bought 80 hectares --?

86 hectares.

-- 86 hectares. It's a big piece of land. And the long-term vision on this piece of land is to build a new soft drink or non-alcoholic plant, a new brewery, and a new warehouse. But of course, the periods to build each one of these are different.

In the case of the warehouse, we need it immediately, because we need capacity for warehousing. We are renting warehouses and it's very expensive and it's not convenient and the conditions are not the best. So, we are going to present in the next 30 days the authorizations to build a new warehouse, and we expect to build it very soon.

In the case of the soft drink, before the taxes and before the deceleration of the economy, our expectation was to begin building in 2015 the new soft drink plant. We are postponing it to 2016/2017. Nevertheless, as it takes a lot of time to get the permissions to build a new plant, we are going to present the permissions during August or September.

But we expect to begin construction at the end of 2016, or at the beginning of 2017, considering current trend volumes. This is for soft drinks.

In the case of beer, it's more [futurology], but never before 2020.

Okay.

This is Barbara Angerstein, with Itau BBA. I would like to -- I was wondering if you could give us a little bit more color? I know that you don't look at the market on the individual categories necessarily, but if you can give us a little bit more color of what category -- whether it's beer or soft drinks or other alcoholic beverages -- has been growing more over the last quarters? Just to have an indication of what the general consumption trends in Chile are right now.

Let me see. Here, we have the quarter --. The average in Chile was 8.1%. Non-alcoholic was above the average, but not too much. Beer was below the average, but not too much. And [liquids] were very below the average. This is roughly speaking, Barbara.

Okay.

(Operator Instructions) With no further questions, I'll turn the call back over to your host for closing remarks.

We are still facing economic uncertainties and strong competition in our main geographies. Therefore, we commit ourselves to maintain our efforts searching for efficiencies and brand building in order to keep growing volumes and expanding margins across all our operating segments, reinforcing our commitment to follow the path of operational and commercial excellence.

Thank you very much for attending our conference call, and I hope to see you soon.

Ladies and gentlemen, this will conclude your call for today. Thank you for your participation.