Cost-Cutting Boosts United Breweries Profits

By Dan Caplinger Markets Fool.com

Chile's Compania Cervecerias Unidas (NYSE: CCU) provides a wide variety of beverages to consumers across much of South America, and the company known to many Americans as United Breweries has built up an impressive business. However, coming into Monday's fourth-quarter financial report, United Breweries investors wanted to see evidence that the company would be able to bounce back from what had been a less than perfect quarter three months ago. As it turned out, United Breweries saw even better growth than most had expected.

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Let's take a closer look at United Breweries to see how it did and what's ahead for the beverage specialist in 2017.

Image source: United Breweries.

United Breweries fizzes up

United Breweries' fourth-quarter results gave a breath of fresh air to investors who had gotten used to more sluggish performance from the beverage giant. Net sales rose 6.2% in local-currency terms, and that was even better than the ambitious rebound in sales growth that most investors had expected. Bottom-line performance was even stronger, with net income jumping 39% to 61.9 billion Chilean pesos. That worked out to $0.46 per American depositary share, soaring above the consensus forecast for $0.33 per share.

Looking more closely at the numbers, United Breweries' fundamental performance was strong. Consolidated volume jumped nearly 9% to 7.54 million hectoliters. The company's home Chilean market was the strongest, with 9.6% volume growth, but solid results of 6.3% for the international business segment also showed better conditions across the region. Still, the stubborn devaluation of the Argentine peso had negative impacts, as the currency lost ground both against the Chilean peso and the U.S. dollar.

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United Breweries' various segments had mixed performance. In Chile, the business was strong, with a 13% rise in net sales producing 18% higher pre-tax operating profits. Relatively small increases in overhead costs helped bolster the unit's bottom line. However, the international business operating segment, which includes countries like Argentina, Uruguay, and Paraguay, suffered segment sales declines of 6%. The unit still managed to eke out a 1% gain in pre-tax operating profits, due largely to initiative to boost efficiencies that were able to offset the negative impact of the Argentine peso. Finally, the wine segment enjoyed a 7% rise in sales, but negative exchange rates and higher costs of sales sent segment pre-tax operating profit down almost 1%.

Can United Breweries stay strong in 2017?

CEO Patricio Jottar put the results in perspective. "With the fourth quarter result, we are finishing a difficult year in great shape," Jottar said, "reinforcing our Strategic Plan 2016-2018 with a double focus: growth and efficiencies." The CEO believes that efforts to cut costs and manage sales more effectively should keep paying off during 2017.

One key to United Breweries' success has been the extent to which it has kept its balance sheet healthy. Over the past year, the company has kept its levels of current assets stable, although it has spent down some of its cash reserves. Yet even more importantly, total debt has remained stable, with short-term debt rising slightly even as long-term debt has fallen by roughly the same amount. Liquidity ratios for the company fell slightly during the year, but overall, United Breweries should have the financial capacity to make strategic moves if it chooses to do so in the future.

United Breweries investors didn't react all that strongly to the report, with shares climbing 1% in the two trading sessions following the report. Over the long run, the health of the South American economy will be the biggest factor in determining United Breweries' future fundamental success. If favorable signs out of Brazil and other key economies in the region are any indication, then the beverage giant should be able to hang onto the improving performance that it saw in the fourth quarter and sustain it throughout 2017.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends United Breweries. The Motley Fool has a disclosure policy.