Business context and reporting period
Compañía Cervecerías Unidas S.A. (CCU; U.S. translation: United Breweries Company, Inc.) filed its Form 20-F annual report for the fiscal year ended December 31, 2019. The company reports under IFRS as issued by the IASB, with Chilean pesos (CLP) as its presentation currency. CCU is a diversified beverage producer operating principally in Chile, Argentina, Bolivia, Paraguay and Uruguay, with joint-venture operations in Colombia and wine operations across more than 80 export markets. Its segments are Chile, International Business and Wine.
Chile generated approximately 64% of 2019 segment sales, International Business 25% and Wine 12%. IRSA controlled 60.0% of the common shares as of March 31, 2020. The company had 369,502,872 common shares outstanding and each ADS represented two common shares.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | CLP 1,822,541 million | CLP 1,783,282 million | +2.2% |
| Sales volume | 3,003.2 million liters | 2,853.0 million liters | +5.3% |
| Gross profit | CLP 914,223 million | CLP 923,271 million | -1.0% |
| Gross margin | 50.2% | 51.8% | -160 bps |
| Adjusted Operating Result | CLP 230,808 million | CLP 468,722 million | -50.8% |
| Adjusted Operating Result margin | 12.7% | 26.3% | -1,360 bps |
| ORBDA | CLP 335,829 million | CLP 562,011 million | -40.2% |
| Net income | CLP 145,646 million | CLP 322,085 million | -54.8% |
| Net income attributable to parent | CLP 130,142 million | CLP 306,891 million | -57.6% |
| Basic and diluted EPS | CLP 352.21 | CLP 830.55 | -57.6% |
Net sales growth reflected 5.3% higher volumes, partly offset by a 2.9% decline in average prices in CLP terms. Cost of sales increased 5.6% and represented 49.8% of sales, compared with 48.2% in 2018. MSD&A increased 3.4% to CLP 704,571 million, or 38.7% of sales.
- Chile: Sales rose 4.9% to CLP 1,164,304 million, with volume growth of 4.9%. Adjusted Operating Result declined 1.1% to CLP 200,429 million; margin decreased to 17.2% from 18.3%.
- International Business: Sales declined 4.0% to CLP 464,487 million despite 7.6% volume growth. Adjusted Operating Result fell 92.6% to CLP 19,653 million, primarily reflecting the absence of the 2018 ABI transaction gain and Argentina-related currency and inflation pressures.
- Wine: Sales increased 2.8% to CLP 212,322 million, while Adjusted Operating Result increased 25.6% to CLP 28,477 million. The margin improved to 13.4% from 11.0%.
Operating cash flow was CLP 242,320 million, down from CLP 429,313 million in 2018. Investing cash outflow was CLP 144,186 million, including CLP 140,488 million of capital expenditures. Financing cash outflow was CLP 199,420 million, including CLP 218,035 million of dividends paid. Cash and cash equivalents were CLP 196,369 million at year-end, including CLP 101,077 million of securities purchased under resale agreements.
Reported interest-bearing debt was approximately CLP 315,819 million, comprising CLP 68,386 million current and CLP 261,769 million non-current financial liabilities in the statement of financial position. CCU reported compliance with all debt covenants, including a consolidated interest coverage ratio of 12.11, consolidated leverage ratio of 0.59 and financial leverage ratio of 0.07. Approximately 96% of debt was fixed-rate before swaps and 98.6% after swaps.
Total assets were CLP 2,353,691 million, down from CLP 2,405,865 million, while total shareholders’ equity increased to CLP 1,442,927 million from CLP 1,389,116 million. The company reported no material off-balance-sheet arrangements other than ordinary commitments, guarantees and lease-related items disclosed in the filing.
Material changes versus the prior comparable period
- The 2018 results included a one-time CLP 208,842 million operating gain and CLP 157,359 million parent-level net-income benefit from the early termination of the Budweiser license in Argentina and related ABI agreements. This explains a substantial portion of the 2019 year-over-year declines in operating profit and net income.
- Argentina remained hyperinflationary under IAS 29. The Argentine peso depreciated approximately 72.4% on average and 58.9% at year-end against the U.S. dollar, while inflation was approximately 54%. These conditions increased dollar-linked costs and reduced reported CLP results.
- CCU’s Chilean market share increased to approximately 43.8% in 2019 from 43.4% in 2018. International Business market share increased to approximately 16.7% from 15.8%, while Wine market share remained approximately 17.7%.
- CCU completed the acquisition of Argentine wine assets from Pernod Ricard, including the Graffigna, Colón and Santa Silvia brands and related assets. It also acquired additional interests in Cervecería Szot and made capital contributions to BBO and other subsidiaries.
- Capital expenditures increased to CLP 140,488 million from CLP 131,440 million. The company began construction of a new non-alcoholic beverage production plant in Santiago as part of the CCU Renca project.
- CCU adopted IFRS 16 in 2019, recognizing right-of-use assets and lease liabilities. Lease liabilities were CLP 33,070 million at year-end.
Outlook, management commentary, risks and unusual items
Management’s 2019–2021 strategic plan focuses on profitable growth, stronger brands, innovation, efficiency through the “ExCCelencia CCU” program, employee development and sustainability. Planned 2020 capital expenditures were CLP 184,914 million, including CLP 103,172 million for production assets and CLP 138,497 million allocated to Chile. Planned capital expenditures for 2020–2023 total CLP 591,033 million, although management cautioned that the program could change materially because of economic conditions and COVID-19 uncertainty.
At the filing date, CCU stated that it continued producing, selling and distributing products throughout its operations and had implemented contingency measures for COVID-19. Management could not predict the pandemic’s impact on demand, production, distribution, liquidity or financial results.
- Macroeconomic and political risk: Chile experienced significant social unrest beginning in October 2019, creating uncertainty around consumer confidence, economic growth and commercial operations.
- Argentina: recession, hyperinflation, possible price controls, currency depreciation, financing constraints and difficulty passing through cost increases remain significant risks.
- Currency and input costs: approximately 64% of direct costs were denominated in or indexed to foreign currencies, while only approximately 7% of sales were export sales in foreign currencies. Raw materials include malt, cans, sugar, concentrates, plastic resin, grapes and wine.
- Competition and licensing: CCU competes with large international brewers and depends on the renewal and continued compliance with several license agreements. Approximately two-thirds of sales volume was derived from private-label products.
- Regulation and environmental matters: food labeling, alcoholic-beverage advertising, excise taxes, water rights, packaging, recycling and climate-related regulation could increase costs or constrain marketing and operations.
- Concentration and supply chain: supermarket consolidation increases customer bargaining power and counterparty exposure. The company relies on single suppliers for certain aluminum cans and Argentine malt, although it reported no material supply shortages historically.
- Unusual items: the 2018 ABI transaction gain was non-recurring. The 2019 results also included a CLP 3,043 million bargain-purchase gain related to the Argentine wine acquisition.
CCU’s dividend policy targets distribution of at least 50% of annual distributable profit attributable to the parent. Dividends relating to 2019 totaled CLP 94,205 million, or 72.4% of parent-attributable net income, including CLP 75 per share interim and CLP 179.95079 per share final dividends.
Most important facts an investor should verify
- Reconcile 2019 profitability with a normalized 2018 base excluding the CLP 208,842 million ABI transaction gain.
- Review Argentina’s IAS 29 hyperinflation adjustments, currency translation effects and sensitivity to further peso depreciation and inflation.
- Assess whether volume growth can offset lower CLP pricing, foreign-currency input costs and gross-margin compression.
- Verify the liquidity impact of CLP 184,914 million planned 2020 capital expenditures, dividends and contractual obligations totaling CLP 2,013,597 million.
- Review debt maturities, UF-indexed obligations, lease liabilities, covenant definitions and the company’s ability to refinance in stressed markets.
- Evaluate COVID-19 effects after December 31, 2019, because the filing states that the potential impact could not yet be quantified.
- Confirm the status and economics of the proposed sale of CCU’s 40% interest in Americas Distilling Investments LLC and the Barsol business.
- Monitor renewal conditions for major Heineken, PepsiCo, Schweppes, Gatorade, Coors, Miller and other licensing arrangements.
- Review environmental, water-use, packaging and labeling developments in Chile and the other countries of operation.
- Verify the audited financial statements and notes for contingencies, related-party transactions, guarantees and impairment testing of goodwill and indefinite-lived trademarks.