CCU

Business Context and Reporting Period

Company: Compañía Cervecerías Unidas S.A. (United Breweries Company, Inc.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: CCU is a diversified beverage company operating principally in Chile and Argentina. It is the largest brewery in Chile (approx. 86% market share), the second largest in Argentina (approx. 16% market share), and a major producer of soft drinks, mineral water, wine, and pisco in Chile. The company operates through five primary segments: Beer Chile, Beer Argentina, Soft Drinks & Mineral Water, Wine, and Pisco.

Key Financial Metrics (2006)

Note: All figures are in millions of constant Chilean pesos (Ch$) of December 31, 2006 purchasing power, unless otherwise noted.

Material Changes vs. Prior Period (2005)

• Revenue Growth: Consolidated net sales increased 8.6% to Ch$545.8 billion, driven by higher volumes in beer (Chile and Argentina), soft drinks, and pisco, partially offset by a decline in wine sales.
• Profitability: Operating income rose 17.4% to Ch$79.7 billion. Net income increased 13.5% to Ch$55.8 billion (Chilean GAAP). The increase in net income was primarily due to higher pre-tax income, partially offset by a higher effective tax rate (20.4% in 2006 vs. 15.9% in 2005).
• Segment Performance:
  • Beer Chile: Sales up 13.1% (volume +12.9%); Operating income up 17.9%.
  • Beer Argentina: Sales up 21.1% (volume +7.7%, price +12.3%); Operating income up 56.8%.
  • Soft Drinks: Sales up 8.7%; Operating income up 5.3%.
  • Wine: Sales down 11.1% due to lower export volumes and prices; Operating income down 30.4%.
  • Pisco: Sales up 15.1%; Turned profitable with operating income of Ch$713 million (vs. loss of Ch$1.5 billion in 2005).
• Non-Operating Items: Non-operating income increased 135.8% to Ch$7.8 billion, largely due to a one-time gain of Ch$3.4 billion from the sale of properties. Non-operating expenses increased 35.5% to Ch$17.0 billion, driven by Ch$1.6 billion in restructuring costs and higher provisions for asset write-offs.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth in beer (Chile and Argentina), mineral water, and nectars. The wine business is expected to recover profitability through cost reductions and a focus on key export markets. The pisco business is expected to maintain price levels and launch new products.
• Capital Expenditures: Planned CAPEX for 2007 is approximately Ch$65.9 billion, focused on production capacity expansion, packaging lines, and marketing assets.
• Key Risks:
  • Competition: Aggressive pricing and new product launches by competitors (e.g., Cervecería Chile in Chile, Quilmes/AmBev in Argentina) could erode market share and margins.
  • Raw Material Costs: Fluctuations in the cost of malt, sugar, and grapes, and the inability to pass these costs to consumers.
  • Energy Costs: Restrictions on gas exports from Argentina to Chile have increased energy costs; estimated impact of Ch$2.2 billion for 2007.
  • Exchange Rates: Volatility in the Chilean peso and Argentine peso against the U.S. dollar impacts reported earnings and export competitiveness.
  • Regulatory: Potential restrictions on alcohol advertising and consumption in Chile.

Important Facts for Investor Verification

• Accounting Differences: Significant differences exist between Chilean GAAP and US GAAP regarding goodwill amortization (not amortized under US GAAP), severance indemnities, and deferred taxes. US GAAP Net Income (Ch$52.9 billion) is lower than Chilean GAAP Net Income (Ch$55.8 billion) for 2006.
• Dividend Policy: The company declared a total dividend of Ch$112.62 per share for 2006 (Ch$35.00 interim + Ch$77.62 final), representing 65% of net income available for distribution.
• Debt Covenants: The company maintains strict debt covenants, including a minimum consolidated equity of UF 15 million and an interest coverage ratio of at least 3.0. As of Dec 31, 2006, the company was in compliance with all covenants.
• Market Share Estimates: The company notes that its internal market share estimates often differ from third-party sources (e.g., Nielsen) due to methodology differences, particularly regarding rural vs. metropolitan coverage.
• Related Party Transactions: Significant transactions occur with affiliates of the controlling shareholder (IRSA, owned 50% by Quiñenco and 50% by Heineken Chile), including licensing agreements for Heineken and Budweiser brands.