United Breweries Fizzles Out on Sharply Lower Profits

By Markets Fool.com


Image source: United Breweries.

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Many Americans never consider that many of the same consumer goods they take for granted in the U.S. are available throughout the world, and foreign companies serve the needs of their customers the same way U.S. companies serve American consumers.

In Chile, Compania Cervecerias Unidas (NYSE: CCU), also known as United Breweries, produces beverages with target markets that cover several countries in South America. Coming into its second-quarter financial report, the company's investors hoped United Breweries would be able to hold up reasonably well in what has traditionally been a slow part of the year for its business. Unfortunately, United Breweries' results weren't as good as expected, and that raised some concerns about the company's forward progress over the long run.

Let's take a closer look at how United Breweries did and what's ahead for the beverage-maker going forward.

United Breweries deals with falling financials

United Breweries' second-quarter results were weak, reflecting not only the Southern Hemisphere's winter doldrums, but also some added headwinds. Revenue fell about 1% in local-currency terms, which was actually a bit better than the roughly 3% drop most of those following the stock had expected to see. However, net income plunged by about two-thirds from year-ago levels, and that produced earnings of $0.05 per share in dollar terms. That was far worse than the $0.13 per share consensus forecast among investors.

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Looking more closely at the financials for United Breweries, you can see some of the pressures that hit the company's top and bottom lines. Volume fell by nearly 6% to 4.77 million hectoliters, which the company largely blamed on weather. United Breweries noted that average temperatures in Buenos Aires and Santiago were both about four degrees Celsius below what they were during the second quarter of 2015, and high levels of rainfall in the Chilean capital also weighed on beverage demand. In addition, the devaluation of the Argentine peso compared to the U.S. dollar has continued to hurt United Breweries, in large part because it has increased its cost base and put pressure on profit margin figures.

Those impacts were clearly visible in United Breweries' different segments. Within Chile, sales posted a tiny rise, compared to a 14% hit for the international business segment. The company's wine segment, which makes up about a sixth of its overall revenue, posted solid growth of 14% in local-currency terms, benefiting in part from a weaker Chilean peso compared to the U.S. dollar and other currencies in its export markets. Those effects showed up on the bottom line as well, with segment pre-tax income climbing by nearly half in the wine business but falling in its core Chilean and international segments.

CEO Patricio Jottar tried to accentuate the positives in the report. Despite falling volumes, Jottar said, "we have been able to slightly increase our market share in our different geographies." Moreover, restructuring efforts will pay off in long-term efficiency gains even though they pulled down results in the short run.

Can United Breweries fizz up again?

United Breweries continues to follow its strategic plan, which includes a heavy emphasis on the ExCCelencia CCU efficiency program. The CEO believes restructuring efforts will help the company face difficult times, and United Breweries is still focusing on brand-building, growth, and stronger efficiency in all six of the countries whose markets it serves, and beer and non-alcoholic beverages remain its emphasis going forward.

Investors need to understand, though, that seasonal differences will appear different than what they're used to seeing throughout much of the rest of the world. The summer months in the Northern Hemisphere are South America's winter, and given United Breweries' emphasis on warm-weather soft drinks and beer, it's harder for the company to produce growth in the winter months. If the company ever pushes northward, it might be able to gain some seasonal diversification, but for now, it seems content with the extent of its current market.

United Breweries stock didn't react well to the news, falling about 5% after the announcement. Nevertheless, if the company's vision for its future pans out, this quarter's sluggish results could prove simply to be a weather-related aberration.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends United Breweries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.