CCU

Business Context and Reporting Period

Company: Compañía Cervecerías Unidas S.A. (CCU), trading as United Breweries Company, Inc.
Reporting Period: Fiscal year ended December 31, 2008.
Accounting Basis: Financial statements are prepared under Chilean GAAP (Chilean GAAP), adjusted for inflation. A reconciliation to U.S. GAAP is provided.
Operations: CCU is a diversified beverage company operating primarily in Chile and Argentina. It is the largest brewer in Chile (approx. 86% market share) and the second largest in Argentina (approx. 21% market share). The company also produces soft drinks, mineral water, wine, spirits (pisco and rum), and confectionery products.

Key Financial Metrics (Chilean GAAP)

All figures in millions of constant Chilean pesos (Ch$) as of December 31, 2008 purchasing power, unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 14.3% to Ch$781.8 billion, driven by higher volumes in beer (Chile and Argentina) and non-alcoholic beverages. The acquisition of ICSA in Argentina significantly boosted Argentine beer sales (up 90.1%).
• Profitability Decline: Net income decreased 4.2% to Ch$82.6 billion. This decline was primarily due to the absence of a one-time gain of Ch$16.2 billion recorded in 2007 from the sale of shares in the water business to Nestlé.
• Segment Performance:
  • Beer Chile: Sales up 5.2%; Operating income down 2.4% due to higher raw material costs and energy expenses.
  • Beer Argentina: Sales up 90.1%; Operating income up 128.6% (Chilean pesos) due to the ICSA acquisition and price increases.
  • Non-Alcoholic Beverages: Sales up 5.7%; Operating income up 18.9%.
  • Wine: Sales up 5.1%; Operating income up 12.7%.
  • Spirits: Sales down 3.4%; Operating income up 73.6% due to lower grape costs.
• Debt Increase: Total debt rose to Ch$247.5 billion (from Ch$188.9 billion in 2007) to finance acquisitions and capital expenditures.

Guidance, Outlook, and Risks

• Outlook: Management noted a successful 2008 with record sales volumes. However, they anticipate continued high costs for certain raw materials, specifically malt, in the first quarter of 2009. The company plans to migrate to International Financial Reporting Standards (IFRS) in 2009.
• Key Risks:
  • Competition: Intense competition in Chile (Cervecería Chile/Anheuser-Busch InBev) and Argentina (Quilmes/Anheuser-Busch InBev) poses risks to market share and pricing power.
  • Commodity Prices: Exposure to fluctuations in global prices for malt, sugar, and packaging materials, which are often priced in U.S. dollars.
  • Exchange Rates: Significant exposure to the Chilean peso vs. U.S. dollar and Argentine peso fluctuations, affecting reported earnings and costs.
  • Regulatory: Potential restrictions on alcohol advertising and consumption in Chile; price controls and tax changes in Argentina.
  • Energy Costs: Restrictions on gas exports from Argentina to Chile have increased energy costs for production plants.
• Unusual Items: The 2007 financials included a significant non-recurring gain from the sale of water business shares to Nestlé, which is not present in 2008, making year-over-year net income comparisons difficult without adjustment.

Investor Verification Checklist

• IFRS Transition: Verify the impact of the 2009 migration from Chilean GAAP to IFRS on future financial reporting and comparability.
• Argentina Exposure: Assess the integration of the ICSA acquisition and the stability of the Argentine economic and regulatory environment.
• Raw Material Hedging: Review the company's strategy for managing volatility in malt and sugar prices, given the lack of hedging mentioned for some commodities.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the interest coverage ratio (14.39:1) and leverage ratio (1.49:1) as of year-end 2008.
• Dividend Policy: Note the policy to distribute at least 50% of liquid profits as dividends; verify the sustainability of this payout ratio given the decline in net income.
• U.S. GAAP Reconciliation: Review the reconciliation table (Note 24) to understand the significant differences between Chilean GAAP and U.S. GAAP net income, particularly regarding goodwill amortization and derivative accounting.