Quinsa Q2
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Quinsa Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Quilmes Industrial S.A. ("Quinsa") <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LQU)") else Response.Write("(NYSE: LQU)") end if %> BACKGROUND
Quinsa is a Luxembourg-based holding company which controls 85% of Quilmes International Ltd. (Bermuda). The remaining 15% share is owned, since 1984, by Heineken Brouwerijan, NV (Heineken) which renders technical assistance to the operating companies. In 1991, Quinsa spun off from Entreprises Quilmes and was listed in US dollars as a separate company on the Luxembourg Stock Exchange. As of March 1996, Quinsa's American Depository Shares, representing the company's preferred shares, have been listed on the NYSE under the symbol LQU.
Quinsa is a leading brewer in South America with operations in Argentina, Chile, Paraguay, Uruguay, and Bolivia. Their beer brands are market leaders in Argentina, Paraguay and Uruguay and have a strong presence in Bolivia and Chile. They also produce hops, malt, and mineral water in Argentina, control the largest soft drink and bottled manufacturing facility in Paraguay, as well as produce malt and mineral water in Uruguay. In Paraguay, their soft drink business continues to lead the market.
UNION CITY, Ca., September 19, 1996/FOOLWIRE/ --- This morning, Quinsa reviewed their operating results for the first six months of FY 1996 and provided an overview of the competitive situation in each of their markets. For the six months ended June 30,1996 their net sales increased to $378.5 million from $372.8 million a year ago due to the higher volumes obtained through the sales of their mineral water business in Argentina and an improvement in the average selling prices of soft drinks in the Paraguayan market.
Total beverage volumes decreased slightly to 6.4 million hectoliters (hl). Sales for beer products remain stable despite a 2.6% decrease in volumes. In Paraguay, volumes of soft drinks sold excluding mineral water, declined by 5.6% with market share constant at approximately 85%.
Operating profits decline to $69.4 million due in part to a $9 million increase in investments in advertising as part of their overall marketing strategy. The recessionary climate in Argentina, though improving slightly, also had an adverse impact on volumes and operating margins. Their net profit increased 24.1% to $31.4 million or $0.30 per share in the first semester from $25.3 million or $0.247 per share in the comparable period a year ago.
RECENT EVENTS
In July they became the owner of a 54.6% stake of Industrias Cerveceras SA (INCESA) which in turn owns 85% of Taquina SA and virtually 100% of Cerveceria Santa Cruz SA which are two breweries in Bolivia. INCESA now controls approximately 35% of the Bolivian market.
In September they agreed to acquire certain assets of Refrescos del Parana SA, the remaining Coca-Cola bottler in Paraguay, which controls 10% of the territory. They also established Quilmes do Brasil Ltda. which will coordinate Quinsa's exports from their plants in Argentina, Paraguay, and Uruguay to Southern Brazil, a region with 25 million people and an initial market potential of approximatley 8 million hectoliters.
MARKET CONDITIONS
In Argentina, the company's net sales of $246.4 million were essentially flat compared with the first semester of 1995 while their overall market share declined to 73.8%. Market share in the greater Buenos Aires area increased steadily since July 1995. They also experienced some erosion in market share in the interior of the country due in part to their competitors deep discounting strategy which they believe will prove to be unsustainable in time. Quinsa beer volumes declined 2.5% to 4 million hectoliters, however, their minteral water volumes inproved by 55.8% reaching 279,000 hectoliters with an increase in market share to 9%. They anticipate that their mineral water business will reach break-even levels by 1997. Operating profits declined to $57.3 million in the first semester of 1996 from $70.9 million a year ago. Contributing factors were increases in prices of malt, increased depreciation expense, increased investments in advertising, and expenses associated with upgrading distribution capabilities in key areas.
Despite a flourishing economy in Chile, volumes for the market as a whole were flat at 1.9 million hectoliters. Quinsa net sales of $15.7 million were comparable to those of a year ago. They raised their prices by approximately 19% and experienced a decrease in volumes to 225,000 hectoliters. Market share for the country as a whole contracted to 11.6% from 12.4% in 1995. A significant portion of the decline in market share came from the central region where a major competitive battle took place in the first semester of 1996.
In Paraguay's current recessionary environment and despite an 11.6% drop in consumption, Quinsa beer volumes increased 1.5% to 603,000 hectoliters. They achieved a significant 7% increase in their market share to 73% compared to 65% in 1995. These results were achieved despite a 15.2% increase in average prices for beer during the period. Prices of soft drinks also increased 11.1%. Net sales increased by 8.3% to $92 million. Their operating profits increased by 37.4% to $20.2 million from a year ago.
In Uruguay, the market as a whole was affected by the continuing recessionary climate and by major changes in Quinsa's distribution system in Montevideo at the beginning of the year. They believe that the changes that were made should favorably impact the business in the coming months. During the first 6 months of 1996 market share declined to 44.5%. Quinsa experienced a 17.6% decline in beer volumes to 173,000 hectoliters. Net sales decreased 12% to $30.1 million while operating profits remained essentially flat.
QUESTION AND ANSWER SESSION
The company was asked what kind of volume trends they are seeing in the last couple of months in Argentina and was asked to comment on some of their advertising expenses in Argentina in terms of what drove some of the increases and what of those expenses are permanent versus more temporary in nature.
The company responded that in terms of the volume trends there are signs that they are firming up. The company had an excellent August. However, they also had to say that August was an unusually hot month so they don't have any way of knowing what portion of that excellent performance was due to an underlying recovery of the market and how much was due to climatic conditions. But, they are seeing some signs that the recovery is starting to take place. Looking at the economy, which is one of the main drivers of the growth in this market, they had a decline in gross national product of about 3% in the first quarter then they had a recover in Q2 of about the same amount which resulted in the first half of 1996 showing essentially zero growth, but the right trend toward positive growth/recovery. The consensus of the economists place a forecast for Q3 of around 6-7% and a similar figure for Q4, which will produce an overall year-to-year of about 3%. But, looking at the trend quarter by quarter, that would indicate that they are finally coming out of the recession and that will undoubtedly have a positive impact on the market volume evolution which is why Quinsa is fairly confident that they will see a second half with better volumes and better results than what they have experienced in the first half.
As far as the advertising expenditures are concerned, advertising expenditures have risen by about $8.7 million over the similar period of last year. Part of that is in connection with a very aggressive drive in connection with Quinsa's sponsoring of sports, in particular soccer in Argentina which has enjoyed high-profile action. Quinsa is now sponsoring 3 of the best and most well-known teams in Argentina and that is part of the increases in their advertising levels which has reached, as a percentage of sales, a figure that is close to 10% from the 8.4% they had last year. They were expecting that slight increase in advertising investment as a percentage of sales on their baseline business. They can see that this could go up, but more in connection with a very aggressive plan of new product launches which are linked to their segmentation policy they described as one of the keys to their competitive strategy going into the future. But, they do not expect a major permanent increase in advertising expenditures on their baseline. If there are increases, they will be in connection with new product launches.
The company was asked whether the 2% price increase they put in place in Argentina in June had been taken. They responded that it has been taken with absolutely no problem.
The company was asked to comment on the deep discounting practices of their competitor in Argentina and why they think it is unsustainable given the fact that their competitor is so well capitalized. The company responded that the fact that a company is well capitalized doesn't mean that it is rational. When they are talking about unsustainable, they are not talking about small discounts that are linked to the natural weakness of a brand, they are referring to punctual actions where the discounts reach 50% and over which brings the margin to an unsustainable level just by the sheer economics of it. That has been used as a tactic to gain distribution in areas where competitors were not present and the tactics are short-lived, in general. They take that practice to get distribution and get some volume going and then, after that, they start coming back to normal discounting levels. As soon as that happens, the market share trends revert and Quinsa starts going up. Quinsa sees the same pattern everywhere. Their competitors starting from zero start getting distribution in certain major cities, starting from Buenos Aires. Soon after that they reach a ceiling in terms of market penetration that is limited by factors, the most important of which is the potential of the brand. Once they reach that, Quinsa starts the process of recovering market share. That is exactly what happened in Buenos Aires. Now Quinsa has market share close to 85% in Buenos Aires.
The company was asked to explain the increase of $30 million in their short term debt and what the cost is. The company responded that the cost of short term debt is around 7% which is in line with what it was last year. The increse is due to the increases in inventory which have increased significantly. So the short term debt increase is financing inventories.
The company was asked to talk about the competitive situation in Chile and the reasons why their market share is lower and also how they see that market developing going forward. The company responded that, until 1995 (since their entry into the market), the market has been growing quite handsomely and so did their market share which reached around 13.4% in 1995. After that, the market growth came to a screeching halt and so did Quinsa's market share. At the same time, during 1995, there were extremely aggressive price wars in the market which produced a reduction in the overall level of prices in the industry. At the same time, there were very significant increases in advertising and promotional expenditures. All of that resulted in a deterioration in the margin situation for both of the major competitors in this market. What they decided to do in the first half of 1996 (specifically around May), based on the confidence they have that their brands are extremely strong in the company's target segments, is focus on margins. They decided to significantly increase their prices, not only by adjusting their list price but also by significantly reducing their discounts to the trade. Their average prices have increased 19% in the first semester, but they have taken even more significant price increase actions during the later part of the first semester. At the same time they have undertaken several restructuring actions to reduce fixed costs. All of that has resulted in a significant improvement in their margin situation. This has obviously had some impact in their market share and volumes, but a much milder impact than what they expected. The fall-off in volumes appears to have taken place in the "marginal consumer" segment of their target audience. They still have strong loyalty among their core target audience. Their goal is to continue growing in volumes and market share, but they want to do so from a base of margins that is very healthy and that is why they took the actions they did in the first half of 1996. So far those actions are going to be successful so they are confident about the near term future. Their competitors agree conceptually with what has to be done in the industry and Quinsa is seeing them also raising prices and eliminating the almost irrational discounting they have witnessed in the past. Their models indicate that the Chilean market should resume growth in the near future.
The company was asked what the impact would be of CCU's (Quinsa's main competitor) introduction of Budweiser later this year in terms of their market share. The company responded that they have enormous respect for Annhaeuser Busch as a company and Budweiser as a brand. Quinsa thinks they will do an extremely professional job in launching that brand. However, the following has to be taken into account: Budweiser will have to gain its position. Budweiser is not what Budweiser is in the United States. They will need to find their niche. There is a niche for Budweiser. Quinsa is very confident in their position and loyalty among their target audience. Quinsa does think that Budweiser will impact weaker brands in the market. Budweiser's introduction is very much linked to their distribution capabilities. Their distribution in the key areas are linked with a soft drink company which is having some problems. They think that may have some impact. Quinsa has a broad product line to protect their key markets and think they will compete very well against Budweiser.
The company was asked to talk about their future strategy for Brazil. The company responded that they have always been very cautious about the complexities of entering the Brazilian market. They do not underestimate what it takes to enter such a huge but highly competitive market. That is what dictated their strategy of a very step-by-step entry into that market. They are now gathering marketing intelligence, performing in-depth market research, testing the components of the marketing links, signing the niches and segments where they have opportunities, etc. in order to minimize the risks of a full-blown entry in that market which will entail very significant investments. The information they have today confirms that it is a very complex market. As a consequence of the slowdown in Brazil and also because they will not shortcut any of the step-by-step approach they have designed, they do not anticipate any major spending in that market this year. They will continue with their exports and their plan.
The company was asked about growth in water volumes and market share. They responded that market share last year was around 6%. Right now they are around 9%. Their volumes are 50% above last year. They are very happy with that. That volume trend is continuing if not improving month by month. Therefore, they are very happy with the evolution of their mineral water business. They are very confident that those volumes will reach break-even point as of the end of this year. That launch, right now, looks very successful.
SUMMARY
The company feels that a lot of what happens in the near future hinges upon a recovery of the Argentine economy. And they really see clear signs that such a recovery is starting to happen. They are certain that Quinsa has an extremely strong competitive position to take advantage of the resumption of growth in the beer market that such a recovery will surely bring about. Therefore they are very confident that they will be able to show significant improvements in their results in the near future. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |