CCU

Business Context and Reporting Period

Company: Compañia Cervecerías Unidas S.A. (United Breweries Company, Inc.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2004
Business Overview: A diversified beverage company operating principally in Chile and Argentina. It is the largest brewery in Chile (approx. 90% market share), the second largest in Argentina (approx. 15% market share), and a major producer of soft drinks, mineral water, wine, and pisco in Chile. The company operates under Chilean GAAP, with financial statements restated for inflation and presented in constant Chilean pesos of December 31, 2004 purchasing power.

Key Financial Metrics (2004)

Note: All figures are in millions of constant Chilean pesos (Ch$) unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 6.9% driven by higher volumes in beer (Chile and Argentina), soft drinks, and nectars. Wine sales volume decreased slightly, offset by higher unit prices.
• Profitability Decline: Despite a 24.9% increase in operating income, Net Income decreased 18.1%. This was primarily due to the absence of a one-time gain of Ch$20,617 million recognized in 2003 from the sale of the company's indirect interest in the Croatian brewery Karlovacka Pivovara.
• Segment Performance:
  • Beer Chile: Sales up 6.4%; Operating income up 13.1% to Ch$44,993 million.
  • Beer Argentina: Sales up 24.0%; Operating loss narrowed significantly from Ch$3,573 million in 2003 to Ch$148 million in 2004.
  • Soft Drinks: Sales up 1.9%; Operating income up 19.3%.
  • Wine: Sales down 3.1% due to a focus on profitability over volume growth and a decrease in bulk wine sales.
• Debt Reduction: Total debt decreased to Ch$135,651 million from Ch$143,474 million, aided by the repayment of a US$135 million syndicated loan and the issuance of new local bonds.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth driven by the consolidation of the pisco industry (via a new joint venture), expansion into the confectionery market, and economic recovery in Chile and Argentina.
• Cost Pressures: Margins in early 2005 were impacted by higher oil prices and the Argentine gas crisis, which forced a switch to diesel oil for production. Management estimates these higher costs will not exceed Ch$2,200 million for 2005.
• Key Risks:
  • Argentina Economic Instability: Continued volatility in the Argentine economy and exchange rates poses a risk to operations and reported earnings.
  • Competition: Aggressive pricing by competitors in Chile (Cervecería Chile) and Argentina (Quilmes/InBev) could erode market share and margins.
  • Raw Material Costs: Fluctuations in global prices for malt, sugar, and grapes, as well as energy costs.
  • Regulatory: Potential increases in excise taxes in Argentina and changes in Chilean alcohol regulations.
• Capital Expenditures: Planned CAPEX for 2005 is approximately Ch$56,718 million, focused on capacity expansion, packaging lines, and marketing assets.

Investor Verification Checklist

• One-Time Gains: Verify the impact of the 2003 Karlovacka sale gain on year-over-year net income comparisons; operating income is a better indicator of core performance.
• Argentina Exposure: Assess the sensitivity of consolidated earnings to the Argentine peso exchange rate and the economic recovery trajectory in Argentina.
• Debt Covenants: Confirm compliance with financial covenants (interest coverage ratio, leverage ratio) on the new US$100 million syndicated loan and local bonds.
• Market Share Trends: Monitor market share data in Chile (currently ~90%) and Argentina (~15%) against competitor activity, particularly InBev/Quilmes.
• Energy Costs: Track the actual impact of the Argentine gas supply restrictions on 2005 operating costs versus the Ch$2,200 million estimate.
• Dividend Policy: Note the policy to distribute 50% of liquid profits as dividends; verify the declaration and payment of the 2004 final dividend.