Fitch Affirms Compania Cervecerias Unidas IDRs at 'A'; Assigns National Scale Rating of 'AA+(chl)'

The rating affirmation is based upon CCU's continued dominance of the Chilean beer market, its geographic and product diversification, stable and strong cash flow, and conservative capital structure.

CCU's dominant position in the Chilean beer market is reflected by its 86% market share position. Despite strong competitive pressures from Cerveceria Chile, a subsidiary of Quinsa that is in turn owned by Ambev, CCU has been able to maintain its strong position in Chile through improved product segmentation, continued innovation in products and presentations, and investments at the point of sale. Through these strategies, CCU has been able to successfully increase per capita consumption of beer in Chile to 36 liters in 2008 from 25 liters in 2002.

Fitch expects CCU to continue to dominate the Chilean beer industry due to its extensive direct-distribution system, diversified portfolio of beer products and the broad appeal of its flagship brand, Cristal. The cash flow generated by CCU's Chilean beer division provide stability to the company's credit-protection measures and underpins the ratings. During 2008, 36% of CCU's consolidated revenues and 55% of its consolidated cash operating profits (EBITDA) were generated by the Chilean beer division.

CCU's ratings also consider its product and geographic diversification. The company has a solid presence in Chile's soft drink, mineral water and nectar industries. During 2008, CCU was the largest bottler and distributor of water in Chile with a market share of 67%, and the third largest bottler of soft drinks with an estimated market share of 25%. The company has a very profitable proprietary portfolio of brands, and it also bottles, markets, sells and distributes PepsiCo, Inc.'s (PepsiCo) and Schweppes Holdings' products. Soft drinks, mineral water and nectar sales accounted for 26% of revenues and 19% of EBITDA.

In December 2008, the company merged its subsidiary, Vina San Pedro (VSP) with wine producer Vina Tarapaca (VT) creating Vina San Pedro Tarapaca (VSPT). Through VSPT, CCU is the third largest wine producer in Chile and second largest exporter. The merger with VT will improve the wine segment's profitability as it will position itself as a more premium, export oriented business. This segment represented 13% of revenues and 8% of EBITDA in 2008, and only includes results from VT starting in October 2008.

CCU's cash flows are further diversified by CCU Argentina, its Argentine brewing operations, which in 2008 accounted for 18% of revenues and 11% of EBITDA. In April 2008, CCU acquired ICSA, an Argentine brewer with a market share of approximately 5.8%. The transaction increased CCU's market share position to approximately 21%; it also increased the company's operating scale and profit margins.

CCU's operations have benefitted from the positive economic cycle experienced in recent years, with strong demand for its products and positive pricing moves. During 2008 CCU's operating results continued the positive trend although at a slower pace, with 6.2% organic volume growth and higher pricing levels for its products. Although EBITDA margins declined to 22.6% in 2008 from 23.4% in 2007, mainly as a result of higher input costs and the effect of currency depreciation upon dollar linked costs, EBITDA grew to US$278 million from US$251 million in the same period.

Results for 2009 should reflect the more negative economic environment. First quarter results already showed some declines in sales volumes. While Fitch expects growth to slow down over the next year reflecting tougher economic conditions, the acquisitions in Argentina and the wine business should help offset some of the negative effects in the other business segments.

CCU generated US$278 million of EBITDA during 2008 and US$295 million during the latest 12 months (LTM) ended March 31, 2009. These figures compare with US$251.3 million in 2007 and US$230 million in 2006. Funds flow from operations (FFO) also showed a positive trend with FFO of US$226 million in 2008 compared to FFO of US$195 million. Although credit protection measures have weakened due to increased debt levels, the ratios remain in the range of the current rating category. At March 31, 2009, total debt to LTM EBITDA was 1.4 times (x), compared to 1.0x at March 31, 2008. Interest coverage as measured by EBITDA/interest expense LTM was 12.9x at March 31, 2009 compared to 17.0x for the same period in 2008.

Historically, the company has maintained a conservative financial profile, with moderate debt levels and strong cash flow generation. As of March 31, 2009, total debt increased to US$402.6 million from US$289.4 million at March 31, 2008. On a net debt basis, net debt increased to US$289.2 million from US$50.1 million in 2008. The debt increase is mainly due to the acquisitions of ICSA in Argentina (US$88 million) and Vina Tarapaca (US$33 million) during 2008 and higher working capital requirements due to rising raw materials prices. Fitch expects debt levels to come down during 2009 and 2010, as the company uses available free cash flow towards debt reduction.

At March 31, 2009, the company's short-term debt represented 34.4% of total debt, mainly due to the maturity of a US$100 million syndicated loan that matures in November 2009. On April 2, 2009, the company issued bonds in the local market equivalent to US$180 million. The majority of these funds will be used to refinance the syndicated loan and a US$33.1 million bridge loan used for the Tarapaca transaction, in addition to other uses. With the transaction the company lowers its financing cost in addition to improving the maturity profile of its debt.

CCU is the largest brewer in Chile. Through its subsidiaries CCU also has significant market shares in the Chilean wine, carbonated soft drink, mineral and purified water, nectar and spirits industries. In Argentina, CCU owns the second-largest brewery, as well as a winery. The company also has a small presence in the confectionary business in Chile. CCU is controlled by Inversiones y Rentas S.A. (IRSA), which has a 66.1% stake in the company. IRSA, in turn, is a 50/50 joint venture between Quinenco S.A., a Chilean holding company with investments in telecom, banking and manufacturing, and Heineken, one of the largest brewers in the world.

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SOURCE: Fitch Ratings

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