Business context and reporting period
Compañía Cervecerías Unidas S.A. (CCU), also identified in the filing as United Breweries Company, Inc., filed its annual Form 20-F for the fiscal year ended December 31, 2020. CCU is a Chile-based, multi-category beverage company operating primarily in Chile, Argentina, Uruguay, Paraguay, Bolivia and through joint ventures in Colombia. Its products include beer, soft drinks, water, wine, spirits, pisco, cider and related beverages. The financial statements were prepared under IFRS as issued by the IASB and are presented in Chilean pesos (CLP).
The filing is annual rather than a standalone quarterly report; fourth-quarter information is included within the fiscal-year discussion.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | CLP 1,857,594 million | CLP 1,822,541 million | +1.9% |
| Gross profit | CLP 873,558 million | CLP 914,223 million | -4.4% |
| Gross margin | 47.0% | 50.2% | -320 bps |
| Adjusted operating result | CLP 186,591 million | CLP 230,808 million | -19.2% |
| Adjusted operating margin | 10.0% | 12.7% | -270 bps |
| ORBDA | CLP 296,405 million | CLP 335,829 million | -11.7% |
| Net income | CLP 108,195 million | CLP 145,646 million | -25.7% |
| Net income attributable to parent | CLP 96,152 million | CLP 130,142 million | -26.1% |
| EPS | CLP 260.22 | CLP 352.21 | -26.1% |
| Total sales volume | 3,069.3 million liters | 3,003.2 million liters | +2.2% |
Net sales growth reflected 2.2% higher consolidated volume, partly offset by a 0.3% decline in average prices in CLP terms. Cost of sales increased 8.3%, or 6.0% per hectoliter, causing gross-margin compression. Marketing, selling, distribution and administrative expenses were essentially flat at CLP 704,790 million, benefiting from efficiency initiatives.
- Chile segment: Sales increased 6.7% to CLP 1,242,763 million, with volume up 3.4%. Adjusted operating result declined 12.9% to CLP 174,662 million, and margin fell to 14.1% from 17.2%.
- International Business: Sales declined 13.3% to CLP 402,829 million, with volume down 1.3%. Adjusted operating result shifted to a CLP 1,351 million loss from a CLP 19,653 million profit, primarily due to Argentina.
- Wine: Sales increased 10.8% to CLP 235,210 million, with volume up 10.2%. Adjusted operating result increased 10.7% to CLP 31,529 million, with a stable 13.4% margin.
Cash flow, liquidity and capital structure
- Net cash from operating activities was CLP 280,670 million, compared with CLP 242,320 million in 2019.
- Cash used in investing activities was CLP 140,545 million, including CLP 122,787 million of capital expenditures.
- Financing activities generated net cash of CLP 64,750 million, primarily due to CLP 269,337 million of new borrowings, partly offset by CLP 102,136 million of dividends and CLP 95,956 million of loan repayments.
- Cash and cash equivalents were CLP 396,389 million at December 31, 2020, compared with CLP 196,369 million at December 31, 2019. Including repos and other short-term financial instruments, reported liquidity was approximately CLP 515,746 million.
- Interest-bearing debt was approximately CLP 490,457 million, compared with CLP 330,155 million in 2019. Consolidated total financial liabilities, including certain derivative obligations, were CLP 514,141 million.
- Total assets increased to CLP 2,525,337 million from CLP 2,353,691 million, while total shareholders’ equity declined to CLP 1,408,819 million from CLP 1,442,927 million.
- Approximately 98% of debt was fixed-rate before swaps, and management stated that 100% was fixed-rate after considering interest-rate and cross-currency swaps.
- CCU reported compliance with its financial covenants, including interest coverage of 10.32, consolidated leverage of 0.76 and consolidated financial leverage of 0.06.
Material changes versus the prior comparable period
- COVID-19 restrictions reduced higher-margin on-premise consumption occasions, particularly during the second and third quarters, although stronger first- and fourth-quarter performance supported full-year volume growth.
- Currency depreciation materially affected results. The Chilean peso depreciated 12.8% on average against the U.S. dollar in 2020, while the Argentine peso depreciated approximately 46.7% on average. These movements increased dollar-linked costs and reduced translated Argentine revenue.
- International Business profitability deteriorated sharply because of Argentina’s inflation, currency depreciation, pricing constraints and pandemic-related restrictions. Argentina remained a hyperinflationary economy under IAS 29.
- Gross margin declined because cost of sales grew faster than revenue. Chilean cost of sales increased 15.9%, primarily due to higher U.S.-dollar-linked costs.
- Other gains and losses changed from a CLP 3,157 million gain in 2019 to a CLP 11,410 million loss in 2020, including losses on foreign-exchange derivatives and CLP 6,029 million of impairment losses, principally related to Bolivia and certain properties.
- The company increased debt during 2020 through local bond issuances totaling 6.5 million UF, including CCU Series L and M bonds and VSPT Series D bonds.
- The company acquired full ownership of Sajonia Brewing Company in Paraguay, acquired control of Mahina SpA, and launched La Barra as an e-commerce subsidiary. It also launched Hard Fresh, Chile’s first hard seltzer under the company’s portfolio.
- Water consumption per liter produced declined 48.6%, greenhouse-gas emissions declined 35.7%, and industrial solid-waste recovery reached 99.4% under the 2020 environmental program.
Guidance, outlook, commentary and risks
Management expected 2021 capital expenditures of approximately CLP 187,849 million, including CLP 149,069 million in Chile. Planned capital expenditures for 2022 through 2024 were CLP 135,924 million, CLP 110,276 million and CLP 125,752 million, respectively. Management cautioned that these plans could change because of COVID-19, economic conditions, inflation, interest rates, foreign exchange and competitive factors.
Management stated that operating cash flow and available cash were expected to be sufficient for working capital, capital expenditures, interest, dividends and debt service over the next 12 months and the foreseeable future. The filing does not provide formal earnings guidance for revenue, operating profit or net income.
- Principal risks include renewed COVID-19 restrictions, weaker consumer demand, Chilean political and economic uncertainty, Argentine recession and hyperinflation, currency depreciation, foreign-exchange exposure, commodity and packaging costs, water availability, supply-chain interruptions and cybersecurity incidents.
- CCU faces intense competition from Anheuser-Busch InBev and other beverage producers. In Chile, the company’s estimated weighted volume market share increased to 45.2% in 2020 from 43.8% in 2019; the International Business share increased to 17.7% from 16.7%.
- Approximately 62% of direct costs were in, or indexed to, foreign currencies, while approximately 7% of sales were export sales in foreign currencies. Raw-material exposure is concentrated in cans, malt, concentrates, sugar, plastic resin, grapes and wine.
- Contractual obligations totaled approximately CLP 1,795,284 million, including CLP 1,081,213 million of purchase and supply commitments, CLP 545,976 million of long-term debt obligations and CLP 125,634 million of operating lease commitments.
- The company reported no material legal or administrative proceedings in its principal operating countries, but disclosed litigation and tax-related contingencies, including several Argentine proceedings and indirect guarantees for joint-venture and associate debt.
- IRSA directly and indirectly controlled 60.00% of CCU’s shares at December 31, 2020 and 61.56% as of March 31, 2021, creating controlling-shareholder and minority-investor considerations.
Investor verification checklist
- Reconcile reported debt, cash, repos and derivatives when calculating net debt and liquidity.
- Review the sensitivity of Chilean margins to U.S.-dollar-linked costs and the sensitivity of Argentine results to inflation, pricing controls and currency translation.
- Assess whether International Business can return to profitability after the 2020 loss and whether Argentina’s macroeconomic conditions remain a structural drag.
- Verify the valuation assumptions and subsequent performance of the Bolivia cash-generating unit after the CLP 3,401 million goodwill impairment.
- Compare planned 2021 to 2024 capital expenditures with actual spending and operating cash generation.
- Review debt maturities, bond covenants and the effect of the 2020 bond issuances on refinancing risk.
- Monitor COVID-19 restrictions, on-premise channel recovery, packaging mix and the sustainability of volume and price growth.
- Confirm the proposed 2020 dividend of CLP 195.17 per share, equal to approximately 75% of parent-attributable net income, and account for Chilean withholding taxes and CLP/USD conversion effects for ADS holders.