Business context and reporting period
Compañía Cervecerías Unidas S.A. (CCU; translated as United Breweries Company, Inc.) filed its annual Form 20-F for the fiscal year ended December 31, 2017. The company prepares consolidated financial statements under IFRS as issued by the IASB, with figures primarily presented in Chilean pesos (CLP). CCU operates beverage businesses in Chile, Argentina, Uruguay, Paraguay, Colombia and Bolivia, with three reportable segments: Chile, International Business and Wine.
CCU is controlled by Inversiones y Rentas S.A., which directly and indirectly owns 60.0% of the common stock. The company had 369,502,872 shares outstanding at year-end; each ADS represents two common shares.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | CLP 1,698,361 million | CLP 1,558,898 million | +8.9% |
| Gross margin | CLP 899,622 million; 53.0% | CLP 817,078 million; 52.4% | Margin +60 bps |
| Adjusted operating result | CLP 234,894 million; 13.8% | CLP 200,652 million; 12.9% | +17.1% |
| ORBDA | CLP 327,094 million; 19.3% | CLP 284,180 million; 18.2% | +15.1% |
| Net income | CLP 148,108 million; 8.7% | CLP 140,082 million; 9.0% | +5.7% |
| Net income attributable to parent | CLP 129,607 million | CLP 118,457 million | +9.4% |
| Operating cash flow | CLP 262,161 million | CLP 190,014 million | +37.9% |
| Capital expenditures | CLP 125,765 million | CLP 128,883 million | -2.4% |
| Total assets | CLP 1,976,229 million | CLP 1,872,027 million | +5.6% |
| Total shareholders’ equity | CLP 1,226,829 million | CLP 1,200,656 million | +2.2% |
Consolidated sales volume increased 5.0% to 2,602.0 million liters. Average prices increased 3.8% in CLP terms. Alcoholic beverages generated CLP 1,158,451 million of sales, non-alcoholic beverages generated CLP 519,946 million, and other products generated CLP 19,964 million.
Operating performance was led by Chile and International Business. Chile sales increased 5.0% to CLP 1,047,119 million and adjusted operating result increased 18.3% to CLP 182,784 million, with margin expanding to 17.5% from 15.5%. International Business sales increased 24.4% to CLP 460,317 million and adjusted operating result increased 117.5% to CLP 45,266 million, with margin expanding to 9.8% from 5.6%. Wine sales increased 1.5% to CLP 204,454 million, while adjusted operating result declined 34.1% to CLP 24,519 million and margin fell to 12.0% from 18.5%.
Cash and cash equivalents were CLP 170,045 million at year-end, including CLP 102,696 million of securities purchased under resale agreements. Cash used in investing activities was CLP 173,614 million, including CLP 125,765 million of capital expenditures and CLP 50,463 million for acquisitions of interests in joint ventures, non-controlling interests and other businesses. Financing activities used CLP 53,001 million, including CLP 75,128 million of dividends paid and CLP 23,086 million of loan repayments, partly offset by CLP 57,777 million of new borrowings.
Interest-bearing debt was CLP 189,108 million at December 31, 2017, comprising bank borrowings, bonds and finance leases. The selected financial data also reports total financial debt of CLP 214,593 million; the filing uses differing debt definitions, so the applicable reconciliation should be verified. Approximately 97% of debt was fixed-rate before swaps and 99% after interest-rate and currency swaps. The company reported a consolidated interest coverage ratio of 13.54x, consolidated leverage of 0.53x and an unpledged-assets-to-unsecured-liabilities ratio of 2.89x, and stated that all debt covenants were satisfied.
Material changes versus the prior comparable period
- Revenue growth accelerated, primarily from higher International Business volumes and market-share gains in Argentina, together with pricing and revenue-management initiatives.
- Gross margin and adjusted operating margin improved as cost of sales and MSD&A declined as percentages of sales. Management attributed the improvement to scale effects, the ExCCelencia CCU efficiency program and distribution and logistics initiatives.
- International Business profitability improved substantially, while Wine profitability deteriorated because of higher wine costs following weak Chilean and international harvests.
- Net financial expenses increased 30.7% to CLP 19,115 million because of higher debt levels in Chile. Income taxes increased to CLP 48,366 million from CLP 30,246 million, reflecting higher taxable income and the increase in Chile’s statutory corporate tax rate to 25.5% for 2017.
- CCU began producing and commercializing Miller Genuine Draft in Argentina and added Miller brands in Colombia. It also acquired 50% of Zona Franca Central Cervecera in Colombia for approximately USD 10.2 million and acquired a 40% interest in Americas Distilling Investments, owner of the BarSol pisco brand.
- CCU agreed with Anheuser-Busch InBev to terminate the Budweiser license in Argentina in exchange for brands and payments of up to USD 400 million before tax over three years. At the filing date, the transaction remained subject to regulatory and definitive-contract approvals; the filing reports that SECOM approved it on March 14, 2018, pending CNDC review of definitive-contract terms.
- CCU increased its VSPT wine subsidiary interest from 67.22% at December 31, 2017 to 83.01% after a tender offer completed in January 2018.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide quantified earnings or revenue guidance. Its 2016–2018 strategic plan emphasizes profitable growth in core beer and non-alcoholic categories and continued efficiencies through the ExCCelencia CCU program. Planned capital expenditures for 2018–2021 total CLP 611,046 million: CLP 173,439 million in 2018, CLP 188,232 million in 2019, CLP 152,871 million in 2020 and CLP 96,504 million in 2021. The company stated that these plans may change based on market, economic, inflation, interest-rate, currency and competitive conditions.
- Major macroeconomic exposures include Chilean economic growth, Argentine inflation, Argentine peso volatility and political or regulatory changes in Chile, Argentina and other operating markets.
- Raw-material and packaging costs are exposed to commodity prices and foreign currencies. The company does not actively hedge several expected cash-flow exposures, including malt, cans, sugar, concentrates, plastic resin, grapes and wine.
- Competition from AB InBev and other large beverage companies could pressure market share, pricing and margins, particularly in Chile and Argentina.
- Excise-tax increases are material risks. Argentina increased the beer excise tax from 8% to 14%, effective March 1, 2018. Chile’s beverage taxes and proposed regulatory changes could also affect demand and profitability.
- Other risks include license renewal or termination, supermarket concentration and counterparty credit risk, single-source suppliers for certain cans and malt, water availability, supply-chain interruptions, cyberattacks, environmental regulation, labor reform and restrictions on beverage labeling and advertising.
- The filing reports no material legal or administrative proceedings in Chile or Argentina, but consolidated provisions for litigation and other contingencies totaled CLP 1,590 million at year-end. It also discloses several Argentine labor, distribution-contract and advertising-fee claims and indirect guarantees, including a USD 7.0 million stand-by guarantee for CICSA borrowings.
- CCU reported no material off-balance-sheet arrangements other than operating lease commitments. Contractual obligations totaled CLP 1,055,150 million, including debt, finance leases, operating leases and purchase obligations.
- The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2017, with no material changes during the year.
Most important facts an investor should verify
- Reconcile the different debt figures reported in the filing, particularly CLP 189,108 million of interest-bearing debt versus CLP 214,593 million of total financial debt.
- Confirm the final regulatory status, consideration received and accounting treatment of the Budweiser license termination and brand exchange with ABI.
- Assess the sustainability of the 2017 International Business margin improvement and the recovery prospects for Wine margins after higher grape and bulk-wine costs.
- Review 2018–2021 capital-expenditure commitments against operating cash flow, dividends and debt maturities.
- Evaluate Argentine inflation, excise-tax changes and currency translation effects, including the company’s stated sensitivity to foreign-exchange and raw-material movements.
- Review license renewal dates, especially Red Bull in Argentina, Chilean soft-drink and sports-drink licenses, and licenses whose terms were under negotiation.
- Verify the January 2018 increase in VSPT ownership to 83.01% and its effects on non-controlling interests, cash flow and future earnings attribution.