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, 2007
Accounting Basis: Chilean GAAP (with reconciliations to U.S. GAAP provided)
Primary Markets: Chile (87.8% of 2007 revenue) and Argentina (12.2% of 2007 revenue)

CCU is a diversified beverage company and the largest brewery in Chile and the second largest in Argentina. Its portfolio includes beer, soft drinks, mineral water, wine, pisco, rum, and confectionery products. The company operates under a joint venture structure with Heineken and Anheuser-Busch for specific brands and markets.

Key Financial Metrics (2007)

Note: All figures are in constant Chilean pesos of December 31, 2007 purchasing power.

Material Changes vs. Prior Period (2006)

• Revenue Growth: Net sales increased 7.2% to Ch$628.3 billion, driven by higher volumes and prices across most categories. Beer sales in Chile grew 6.3%, while Argentine beer sales rose 11.6%.
• Profitability: Operating income surged 18.5% to Ch$101.4 billion. Net income grew 32.1% to Ch$79.2 billion (Chilean GAAP), aided by a one-time gain of Ch$14.9 billion from the sale of shares in the water business to Nestlé.
• Segment Performance:
  • Beer (Chile): Operating income increased 7.7% with a margin expansion to 28.0%.
  • Wine: Operating income jumped 345.5% to Ch$5.7 billion due to lower grape costs and higher bulk wine sales.
  • Spirits: Operating income increased 305.9% following the entry into the rum market.
  • Beer (Argentina): Operating income in Chilean pesos decreased 1.5% due to currency appreciation, though it increased 14.8% in U.S. dollar terms.
• Capital Expenditures: Increased to Ch$53.2 billion in 2007 from Ch$46.6 billion in 2006, focusing on capacity expansion and marketing assets.

Guidance, Outlook, and Risks

Outlook: Management expects favorable growth trends in 2008 but anticipates continued pressure from escalating raw material and energy costs. The company estimates energy cost increases of approximately Ch$4 billion for 2008 due to Argentine gas restrictions.

Key Risks and Contingencies:

• Antitrust Litigation: In March 2008, the National Economic Prosecutor filed a complaint alleging abuse of dominant market position regarding exclusivity clauses. The potential fine is up to Ch$8.42 billion (20,000 UTA).
• Competition: Intense competition in Chile from Cervecería Chile (InBev) and in Argentina from Quilmes (InBev). Consolidation in the global beer industry (e.g., InBev/Anheuser-Busch) poses a long-term threat.
• Input Costs: Fluctuations in the cost of malt, sugar, and energy. The company relies on passing costs to consumers but faces competitive constraints.
• Currency Volatility: Significant exposure to the Chilean peso/U.S. dollar exchange rate, which impacts the valuation of Argentine operations and export revenues.
• Regulatory: Potential restrictions on alcohol advertising and consumption in Chile.

Investor Verification Checklist

• Antitrust Case Status: Verify the current status of the Free Competition Defense Court complaint and the likelihood of the Ch$8.4 billion fine.
• Argentina Operations: Confirm the impact of the recent acquisition of ICSA (completed April 2008) on market share and integration costs.
• One-Time Gains: Assess the sustainability of net income growth by excluding the Ch$14.9 billion gain from the Nestlé water business sale.
• Energy Costs: Monitor the actual impact of Argentine gas restrictions on 2008 operating margins versus the Ch$4 billion estimate.
• Dividend Policy: Note the board's authorization to distribute at least 50% of liquid profits as dividends, subject to Chilean GAAP calculations.