UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

      REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended                         December 31, 2012

 

OR

 

      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

      SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     Date of event requiring this shell company report _____________

 

For the transition period from                _____________ to _____________

 

Commission file number                                                0-20486 

 

COMPAÑIA CERVECERIAS UNIDAS S.A.

 (Exact name of Registrant as specified in its charter)

UNITED BREWERIES COMPANY, INC.

 (Translation of Registrant's name into English)

 

Republic of Chile

 (Jurisdiction of incorporation or organization)

Vitacura 2670, Twenty-Third Floor, Santiago, Chile

 (Address of principal executive offices)

 

Felipe Arancibia, (562-24273401), faranci@ccu.cl Vitacura 2670, Twenty-Third Floor, Santiago, Chile

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

_________________________________________

 

 

Securities registered or to be registered pursuant to section 12(b) of the Act.

 

Title of each class American Depositary Shares Representing Common Stock Common Stock, without par value

Name of each exchange  on which registered New York Stock Exchange New York Stock Exchange*

__________ 

 

*    Not for trading, but only in connection with the registration of American Depositary Shares which are evidenced by American Depositary Receipts

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Not applicable

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Not applicable

 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

Common stock, with no par value:                                 318,502,872

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES          NO     X      

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

YES          NO     X      

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    X     NO_____

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES        NO          

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    X     Accelerated filer         Non-accelerated filer         

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP                    International Financial Reporting Standards as issued               Other____

by the International Accounting Standards Board       X       

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

ITEM 17        ITEM 18         

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES          NO     X      

 

 

Table of Contents
	Page
Introduction	i
Forward Looking Statements	ii
PART I	3
ITEM 1: Identity of Directors, Senior Management and Advisers	3
ITEM 2: Offer Statistics and Expected Timetable	3
ITEM 3: Key Information	3
ITEM 4: Information on the Company	15
ITEM 4A: Unresolved Staff Comments	68
ITEM 5: Operating and Financial Review and Prospects	68
ITEM 6: Directors, Senior Management and Employees	88
ITEM 7: Major Shareholders and Related Party Transactions	99
ITEM 8: Financial Information	105
ITEM 9: The Offer and Listing	107
ITEM 10: Additional Information	109
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk	124
ITEM 12: Description of Securities Other than Equity Securities	129
PART II	130
ITEM 13: Defaults, Dividend Arrearages and Delinquencies	130
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds	130
ITEM 15: Controls and Procedures	130
ITEM 16A: Audit Committee Financial Expert	131
ITEM 16B: Code of Ethics	131
ITEM 16C: Principal Accountant Fees and Services	131
ITEM 16D: Exemptions from the Listing Standards for Audit Committees	132
ITEM 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers	132
ITEM 16F: Change in Registrant’s Certifying Accountants	132
ITEM 16G: Corporate Governance	132
ITEM 16H: Mine Safety Disclosure	134
PART III	135
ITEM 17: Financial Statements	135
ITEM 18: Financial Statements	135
ITEM 19: Exhibits	135
F-PAGES	F-1

 

Introduction

 

In this annual report on Form 20-F, all references to “we,” “us,” “Company” or “CCU” are to Compañía Cervecerías Unidas S.A., an open stock corporation (sociedad anónima abierta) organized under the laws of the Republic of Chile, and its consolidated subsidiaries.  Chile is divided into regions, each of which is known by its roman number (e.g. “Region XI”).  Our fiscal year ends on December 31st. The expression ‘’last three years’’ means the years ended December 31, 2010, 2011 and 2012. Unless otherwise specified, all references to “U.S. dollars” “dollars” “USD” or “US$” are to United States dollars, and references to “Chilean pesos” “pesos”  “Ch$” or “CLP” are to Chilean pesos.  We prepare our financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These are the Company’s fifth annual consolidated financial statements prepared in accordance with IFRS as issued by the IASB and IFRS 1 “First Time Adoption of International Financial Reporting Standards.” Until and including our financial statements for the year ended December 31, 2008, we prepared our consolidated financial statements in accordance with Chilean generally accepted accounting principles (“Chilean GAAP”), which differs in certain important respects from IFRS, and were required to reconcile our financial statements to U.S. generally accepted accounting principles (“US GAAP”). Following the Company’s adoption of IFRS, as issued by the IASB, we are no longer required to reconcile our financial statements to US GAAP. See the notes to our consolidated financial statements included in pages F-1 through F-109 of this annual report.  We use the metric system of weights and measures in calculating our operating and other data.  The United States equivalent units of the most common metric units used by us are as shown below:

 

 

This annual report contains various estimates made by us of market share data and related sales volume information.  These estimates are based on statistics published or made available by A.C. Nielsen Chile S.A. (“Nielsen”) in the case of soft drink, water, wine, rum and pisco sales in Chile, and beer sales in Chile and Argentina for 2010 and thereafter; the Asociación de Cerveceros de Chile (“Acechi”) in the case of beer sales in Chile for years prior to 2010; Inversiones Marco Polo Ltda. (“BBS”) in the case of imports in Chile; the Cámara de la Industria Cervecera Argentina (Argentine Beer Industry Chamber, or “CICA”) in the case of beer sales in Argentina for years prior to 2010; the Asociación Nacional de Bebidas Refrescantes (National Association of Soft Drinks, or “ANBER”) in the case of soft drinks and water; competitors’ public information in the case of wine sales in Chile; and the Asociación de Viñas de Chile, A.G. (Wineries of Chile Association) in the case of Chilean wine exports.  We believe that, due to the methodologies used, the statistics provided by these sources in some cases do not accurately reflect our market share or industry sales volumes.  For example, the Nielsen sampling frame includes only the metropolitan areas of Chile and not the rural areas of the country, where we believe our beer and pisco market share is higher than in the metropolitan areas, due to our distribution system.  Likewise, the sales of one of our Argentine competitors are not reflected in CICA’s statistics because that competitor is not a member of CICA.    As a consequence, we have revised the share estimates from the sources identified above for Chilean and Argentine beer sales, pisco and rum sales to reflect what we believe is a more accurate measure of market shares, taking into account:

 

·         reports published by the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics, or the “INE”),

·         our internal sales data,

·         sales information filed publicly by our competitors, and

·         import and export reports made available by Chilean and Argentine customs authorities.

 

 

However, our revised estimates have not been confirmed by independent sources.  Certain amounts, including percentage amounts, which appear in this annual report have been rounded and may not sum exactly to the totals shown. The amounts and/or percentages corresponding to prior years may differ from the ones originally filed due to new and more accurate information being currently available. 

 

Forward Looking Statements

 

This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities and Exchange Act of 1934, which we refer to as the “Exchange Act.”  These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable.  They also relate to our future prospects, development and business strategies.

 

These forward-looking statements are identified by the use of terms and phrases such as “anticipate;” “believes;” “could;” “expects;” “intends;” “may;” “plans;” “predicts;” “projects;” “will” and similar terms and phrases.  We caution you that actual results could differ materially from those expected by us, depending on the outcome of certain factors, including, without limitation:

 

·         our success in implementing our investment and capital expenditure program;

·         the nature and extent of future competition in our principal marketing areas;

·         the nature and extent of a global financial disruption and its consequences;

·         political and economic developments in Chile, Argentina and other countries where we currently conduct business or may conduct business in the future, including other Latin American countries; and

·         other factors discussed under “Key Information - Risk factors,” “Information on the Company” and “Operating and Financial Review and Prospects.”

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.  We undertake no obligation to publically update any of these forward-looking statements to reflect events or circumstances after the date of this annual report, including, without limitation, changes in our business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

 

 

 

 

PART I

 

ITEM 1: Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

ITEM 2: Offer Statistics and Expected Timetable

 

Not applicable.

ITEM 3: Key Information

 

Selected Financial Data

 

The following table presents selected consolidated financial data as of and for the years ended December 31, 2012, 2011 and 2010 which has been derived from our consolidated financial statements prepared in accordance with IFRS and included elsewhere in this annual report, and as of and for the years ended December 31, 2009 and 2008 which has been derived from our consolidated financial statements prepared in accordance with IFRS and not included in this annual report. The financial data set forth below should be read in conjunction with the consolidated financial statements and related notes and “Item 5: Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

 

 

 

 

 

Exchange Rates. Prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in those cases explicitly authorized by the Central Bank of Chile.  The Central Bank Act, which was enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign currency.  Currently, pursuant to the Central Bank Act, the Central Bank of Chile has the authority to mandate that certain purchases and sales of foreign currency specified by law are to be carried out in the formal exchange market.  The formal exchange market is formed by banks and other entities authorized by the Central Bank of Chile.  All payments and distributions made to our holders of ADSs must be transacted in the formal exchange market.

 

In order to keep fluctuations in the average exchange rate within certain limits, the Central Bank of Chile has in the past intervened by buying or selling foreign currency on the formal exchange market.  In September 1999, the Central Bank of Chile decided to limit its formal commitment to intervene and decided to exercise it only under extraordinary circumstances, which are to be announced in advance.  The Central Bank of Chile also committed to provide periodic information about the levels of its international reserves.

 

On April 10, 2008, the Central Bank of Chile announced a program to buy US$8 billion in the local exchange market between April and December 2008. On March 24, 2009, the Central Bank of Chile published an agreement allowing the sale of dollars. On January 3, 2011, the Central Bank of Chile announced a program to buy US$12 billion starting January 5, 2011 with purchases of up to US$50 million per day.

 

The observed exchange rate is the average exchange rate at which commercial banks conduct authorized transactions on a given date, as certified by the Central Bank of Chile.  The Central Bank of Chile generally carries out its transactions at the spot market rate.  Authorized transactions by banks are now generally conducted at the spot market rate.

 

Purchases and sales of foreign currencies effected outside the formal exchange market are carried out in the Mercado Cambiario Informal (the informal exchange market).  The informal exchange market reflects the supply and demand for foreign currency.  There are no limits imposed on the extent to which the rate of exchange in the informal exchange market can fluctuate above or below the observed exchange rate. On March 31, 2013, the average exchange rate in the informal exchange market was CLP472.34 per U.S. dollar and the U.S. dollar observed exchange rate was CLP472.03 per U.S. dollar, which is explained by the current excess of foreign currency.

 

The following table sets forth the low, high, average and period-end observed exchange rates for U.S. dollars for each of the indicated periods starting in 2008 as reported by the Central Bank of Chile.  The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

 

 

 

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

Risk Factors

 

 

RISKS RELATING TO CHILE

 

We are substantially dependent on economic conditions in Chile, which may adversely impact our results of operations and financial condition.

 

We are predominantly engaged in business in Chile and 67.9% of our sales revenues in 2012 were generated from our Chilean operations, 24.1% came from operations in Argentina and 8.0% from exports out of Chile.  Thus, our results of operations and financial condition are dependent to a large extent on the overall level of economic activity in Chile.  The Chilean economy has experienced an average annual growth rate of 0.01% between 2008 and 2012, and 5.6% in 2012. In the past, slower economic growth in Chile has slowed down the rate of consumption of our products and adversely affected our profitability.  Chile’s recent economic performance was affected in 2009 by the disruption in the global financial markets and in 2010 by an earthquake, and therefore the growth rate of the 2008-2012 period is not necessarily indicative of future performance.

 

 

Furthermore, Chile, as an emerging market economy, is more exposed to unfavorable conditions in the international markets which can possibly have a negative impact on the demand for our products as well as products of third parties with whom we conduct business. On August 5, 2011, Standard & Poor’s Ratings Group, Inc., or Standard & Poor’s, lowered its long term sovereign credit rating on the United States from AAA to AA+. In addition, significant concerns regarding the sovereign debt of numerous other countries have developed recently and required some of these countries to seek emergency financing. The downgrade of the U.S. credit rating and the ongoing European debt crisis have contributed to the instability in global financial markets. The sovereign debt crisis could adversely impact the financial health of the global banking system and lower consumer confidence, which could impact global financial markets and economic conditions in the United States and throughout the world. As a result, any combination of lower consumer confidence, disrupted global capital markets and/or reduced international economic conditions could have a negative impact on the Chilean economy and consequently on our business. In 2012, VSPT, one of CCU’s affiliate, exported 38.4% of its wine volume to Europe and 28% of its Net sales were denominated in Euros. Therefore, the economic crisis in Europe may negatively affect our wine exports, which could have an adverse effect on our results.

 

The relative liquidity and volatility of Chilean securities markets may increase the price volatility of our ADSs and adversely impact a holder’s ability to sell any shares of our common stock withdrawn from our ADR facility.

 

The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States.  For example, the Santiago Stock Exchange, which is Chile’s principal stock exchange, had a market capitalization of approximately US$313.3 billion as of December 31, 2012, while The New York Stock Exchange (“NYSE”) had a market capitalization of approximately US$14.1 trillion and the NASDAQ National Market (“NASDAQ”) had a market capitalization of approximately US$4.6 trillion as of the same date. In addition, the Chilean securities markets can be materially affected by developments in other emerging markets, particularly other countries in Latin America.

 

The lower liquidity and greater volatility of the Chilean markets relative to markets in the United States could increase the price volatility of the ADSs and may impair a holder’s ability to sell in the Chilean market shares of our common stock withdrawn from the ADR facility in the amount and at the price and time the holder wishes to do so.  See “Item 9: The Offer and Listing.”

 

Chilean economic policies, currency fluctuations, exchange controls and currency devaluations may adversely affect the price of our ADSs.

 

The Chilean government’s economic policies and any future changes in the value of the Chilean peso relative to the U.S. dollar could adversely affect the dollar value and the return on any investment in our ADSs.  The Chilean peso has been subject to large nominal devaluations and appreciations in the past and may be subject to significant fluctuations in the future.  For example, in the period from December 31, 2011 to December 31, 2012, the daily average value of the Chilean peso relative to the U.S. dollar increased by 0.6% in nominal terms, whereas the year end value decreased by 7.8%  based on the observed exchange rate for U.S. dollars on those dates. See “Item 3: Key Information-Selected Financial Data-Exchange Rates.”

 

Chilean trading in the shares of our common stock underlying our ADSs is conducted in Chilean pesos.  Cash distributions to be received by the depositary for the shares of our common stock underlying our ADSs will be denominated in Chilean pesos.  The depositary will translate any Chilean pesos received by it to U.S. dollars at the then-prevailing exchange rate with the purpose of making dividend and other distribution payments on the ADSs.  If the value of the Chilean peso declines relative to the U.S. dollar, the value of our ADSs and any distributions to holders of our ADSs received from the depositary may be adversely affected.  See “Item 8: Financial Information – Dividend Policy and Dividends.”

 

 

We are subject to different corporate disclosure requirements and accounting standards than U.S. companies.

 

Although the securities laws of Chile which govern open stock corporations and publicly listed companies such as us have as a principal objective promoting disclosure of all material corporate information to the public, Chilean disclosure requirements differ from those in the United States in certain important respects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities market is not as highly regulated and supervised as the U.S. securities market. We have been subject to the periodic reporting requirements of the Exchange Act since our initial public offering of ADSs in September 1992.

 

 

RISKS RELATING TO ARGENTINA

 

We have significant operations in Argentina, and economic conditions there have adversely affected our results of operations in the past and may do so in the future.

 

In addition to our operations in Chile, we maintain substantial assets in Argentina and derive significant revenue from our operations in Argentina. In 2012, we derived CLP258,941 million, or 24.1%, of our revenues from our Argentinean operations, and, as of December 31, 2012, CLP211,827 million, or 16.0%, of our assets were located in Argentina. Because demand for soft drinks and beverage products usually is correlated to economic conditions prevailing in the local market, which in turn is dependent on the macroeconomic condition of the country, the financial condition and results  of our operations in Argentina are, to a considerable extent, dependent upon political and economic conditions prevailing in Argentina. From 1999 through 2002, Argentina suffered a prolonged recession, which culminated in an economic crisis.  Although the economic situation in Argentina has improved since the 2002 Argentine financial crisis, we have been observing a slowdown and accordingly cannot assure you that economic conditions in Argentina will improve or that our business will not be materially affected if Argentine economic conditions were to deteriorate. See “Item 5: Operating and Financial Review and Prospects – Trend Information.”

 

The Argentine peso is subject to volatility which could adversely affect our results.

 

A devaluation of the Argentine peso may adversely affect our operating results. While the economic situation in Argentina has been improving, we cannot assure you that the Argentine economy will recover or that it will not face a recession, or predict what effect such a recession would have on our operations in Argentina. In 2009, the Company first reported its financial statements under IFRS, using the Argentine peso as the functional currency for our Argentine subsidiaries. They are calculated in said currency and translated into Chilean pesos for consolidation purposes.

 

Argentina’s legal regime and economy are susceptible to changes that could adversely affect our Argentinean operations.

 

The measures taken by the Argentine government to address the Argentine economic crisis of 2002, severely affected the Argentine financial system’s stability and have had a materially negative impact on its reputation. For example, on April 16, 2011, the Argentine government announced its intention to expropriate YPF, S.A. (“YPF”), the largest oil and gas company in Argentina, which is controlled by Repsol YPF, S.A., a Spanish integrated oil and gas company. The Argentine government submitted a bill to Congress to approve the expropriation of 51% of YPF’s capital stock. The nationalized capital stock would be distributed as follows: 49% to certain Argentine provinces and the remaining 51% to the national government. Recently, Argentina has been increasing restrictions on foreign exchange transactions. If Argentina were to experience a new fiscal and economic crisis, the Argentine government could implement economic and political measures, which could adversely impact our business. The unpredictability, timing and scope of possible measures enacted by the Argentine government, including expropriations, higher taxes and exchange control measures, could adversely affect our Argentinean operations and our future results of operations.

 

 

Since January 2006, the Argentine government has adopted different methods to directly and indirectly regulate the prices of various consumer goods, including bottled beer, in an effort to slow inflation. Additionally, the present measures taken by the Argentine government to control the Trade Balance and the limited access to foreign currencies, have negatively impacted the free import of goods and the repatriation of profits. For example, in 2011, a new Argentine policy with respect to imports was put in place which mandates that a company can import goods only if it can demonstrate a flow of exports to balance trading.  This new policy may affect our Argentine operations as we regularly import raw materials and finished products into Argentina. Moreover, another Argentine policy was put in place during 2012 in relation to price control by the Secretariat of Interior Commerce, and in 2013 informal measures were implemented to freeze prices, which has affected pricing in Argentina and may continue to do so in the future.

 

We cannot assure you that these and other measures enacted by the Argentine government will not have an adverse effect on our Argentine operations.

 

 

RISKS RELATING TO OUR BUSINESS

 

Fluctuations in the cost of our raw materials may adversely impact our profitability if we are unable to pass those costs along to our customers.

 

We purchase malt, rice and hops for beer, sugar for soft drinks, grapes for wine and packaging material from local producers or in the international market.  The prices of those commodities are subject to volatility caused by market conditions, and have experienced significant fluctuations over time and are determined by the global supply and demand for those commodities as well as other factors, such as fluctuations in exchange rates, over which we have no control.

 

Although we historically have been able to implement price increases in response to increases in raw material costs and thus have not sought to hedge our exposure to increases in raw material prices, we cannot assure you that our ability to recover increases in the cost of raw materials will continue in the future.  In particular, where raw material price fluctuations do not keep with market conditions in the markets in which we operate, we may have limited capacity to raise prices to offset increases in costs.  If we are unable to increase prices in response to increases in raw material costs, any future increases in raw material costs may reduce our margins and profitability if we are not able to offset such cost increases through efficiency improvements or other measures.

 

We are controlled by one majority shareholder, whose interests may differ from those of holders of our ADSs, and this shareholder may take actions which adversely affect the value of a holder’s ADSs or common stock.

 

As of March 31, 2013, Inversiones y Rentas S.A. (“IRSA”) a Chilean closed corporation, directly and indirectly owned 66.1% of our shares of common stock.  Accordingly, IRSA has the power to control the election of most members of our board of directors and its interests may differ from those of the holders of our ADSs.  IRSA also has significant influence in determining the outcome of any corporate transaction submitted to our shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets and going-private transactions.  In addition, actions by IRSA with respect to the disposition of the shares of common stock that it owns, or the perception that such actions may occur, may adversely affect the trading prices of our ADSs or common stock.

  

Competition in the Chilean beer market may erode our market share and lower our profitability.

 

In 2012, our market share of the Chilean beer market by volume was approximately 78.8%.  Our largest competitor in the Chilean beer market by volume is Cervecería Chile S.A. (“Cervecería Chile”), a subsidiary of Quilmes Industrial S.A. (“Quilmes”), the largest Argentine brewer, and a subsidiary of Companhia de Bebidas das Américas (“AmBev”) since January 2007. AmBev and Interbrew merged in 2004, creating Inbev N.V./S.A. which merged with Anheuser Busch Cos. Inc. on November 18, 2008, forming Anheuser-Busch InBev (“AB Inbev”). In 2012, AB Inbev announced the acquisition of Modelo’s Group, but such acquisition is still pending regulatory approvals.  We estimate that Cervecería Chile had a market share by volume in Chile of approximately 14% in 2012. Often, Cervecería Chile has engaged in aggressive price discounting.  If Cervecería Chile were to amplify its aggressive price discounting practice in the future, we cannot assure you, given the current environment that any such discounting or other competitive activities will not have a material adverse impact on our profitability or market share.

 

 

Additionally, if business conditions in the beer market continue to be relatively favorable in Chile, more enterprises may attempt to enter the Chilean beer market, either by producing beer locally or through imports.  While we expect per capita beer consumption in Chile to continue to increase, mitigating the effect of competition, the entry into the market of additional competitors could further erode our market share or lead to price discounting.

 

Our beer brands in Chile may face increased competition from other alcoholic beverages such as wine and spirits, as well as from non-alcoholic beverages such as soft drinks.

 

Beer consumption in Chile may be influenced by changes in domestic wine, spirits and/or other non-alcoholic beverages’ relative prices.  Increases in domestic wine prices have tended to lead to increases in beer consumption, while reductions in wine prices have tended to reduce or slow the growth of beer consumption. As a result of our lower market share in the Chilean wine, spirits and soft drinks markets as compared to our market share in the Chilean beer market, we expect that our profitability would be adversely affected if beverage consumers were to shift their consumption from beer to either wine, spirits or soft drinks.

 

Quilmes dominates the beer market in Argentina and we may not be able to maintain our current market share.

 

In Argentina, we face competition from Quilmes and from Cervecería Argentina S.A. Isenbeck (“CASA Isenbeck”), a former subsidiary of Warsteiner Brauerei Hans Cramer GmbH & Co. (“Warsteiner”), which was acquired by SABMiller plc on November 24, 2010. We estimate that in 2012 Quilmes had a market share of 73.8% and CASA Isenbeck had a market share of 3.1%. We estimate that our market share of the Argentine beer market was 23.1% in 2012.  As a result of its dominant position in Argentina, Quilmes’ large size enables it to benefit from economies of scale in the production and distribution of beer throughout Argentina.  Therefore, we cannot assure you that we will be able to grow or maintain our current market share of the Argentine beer market.

 

Consolidation in the beer industry may impact our market share.

 

In 2005, SABMiller plc merged with Grupo Empresarial Bavaria, a Colombian brewer with operations in Colombia, Peru, Ecuador and Panama, forming the then second-largest brewer in the world.  In 2010 SABMiller Plc acquired CASA Isenbeck, the third-largest brewer in Argentina.  

 

In March 2004, AmBev and Interbrew announced an agreement to merge, creating the world’s largest brewer under the name InBev. Additionally, in January 2007, AmBev assumed control of Quilmes.  Inbev and Anheuser-Busch merged in November 2008, creating AB Inbev, the world’s global beer leader. In Chile, Quilmes sells its beer through Cervecería Chile, which had a market share of approximately 14% in 2012, and in Argentina it had a market share of approximately 74% in 2012. In 2012, AB Inbev announced the acquisition of Modelo’s Group, but such acquisition is still pending regulatory approvals. As a consequence of the above referenced merger, the brand Budweiser, whose production and distribution license contract was granted to Compañía Cervecerías Unidas Argentina S.A. (“CCU Argentina”) until 2025, belongs to a competitor. Cervecera CCU Chile Ltda. (“CCU Chile”) has a distribution contract until 2015 to distribute Budweiser in Chile. We cannot assure you that the contracts will be renewed.

 

Consolidation in the beer industry has resulted in larger and more competitive participants, which could change the current market conditions under which we operate.

 

 

Restrictions in the gas supply from Argentina have increased our energy costs, and higher oil prices have increased our distribution expenses.

 

Since 2005, the Argentine government has restricted gas exports to Chile due to domestic supply problems. This has increased the cost of operating our beer production plants in Chile and Argentina, as well as our soft drinks plants in Chile. Gas supplies have become stable at the current time, reducing the risk of further cost increases. However, these restrictions have increased electrical power costs. Because our boilers can work with gas or with alternative fuels, such as diesel oil or butane gas, we do not anticipate the need for additional investments. The Chilean government is presently implementing a strategy to diversify energy supply. The construction in Quintero of the first plant to process imported GNL (liquefied natural gas), which started its operation in August 2009, brought relief to the energy issue.  However, we cannot assure you that the supply of energy or the cost thereof will not experience further fluctuations as a result of these policies.  Oil price increases may reduce our margins if we are unable to improve efficiencies or increase our prices to offset them.

 

Changes in the labor market in the countries in which we operate may affect margins in our business.

 

In 2012, Chile’s unemployment rate was relatively low at 6.0%, which had a direct impact on our salary expense given the resulting competition for workers. Additionally, the mining industry’s need for a large unqualified workforce has put additional pressure on salary expenses as our business is work-force intensive, particularly in the distribution area. Furthermore, certain propositions to increase the minimum wage in Chile are currently being discussed in the Chilean Congress, and the passage of any such propositions may result in further increases in our salary expenses, which may have an effect on our margins and profitability.

 

We depend upon the renewal of certain license agreements to maintain our current operations.

 

Most of our license agreements include certain conditions that must be met during their term, as well as provisions for their renewal at their expiry date.  We cannot assure you that such conditions will be fulfilled, and therefore that the agreements will remain in place until their expiration or that they will be renewed, or that any of these contracts will not undergo early termination.  Termination of, or failure to renew our existing license agreements could have an adverse impact on our operations.

 

Consolidation in the supermarket industry may affect our operations.

 

The Chilean supermarket industry has gone through a consolidation process, increasing the importance and purchasing power of a few supermarket chains. As a result, we may not be able to negotiate favorable prices, which may adversely affect our sales and profitability. The importance of supermarkets to our business operations is disclosed in the discussion of each of our business segments.

 

Additionally, and despite having insurance coverage, this supermarket chain consolidation has the effect of increasing our exposure to counterparty credit risk such that we have more exposure in the event one of these large customers fails to honor its payment obligations to us for any reason.

 

Dependence on few suppliers for some important raw materials.

 

In the case of cans, both in Chile and Argentina we purchase from a single supplier, Rexam, with plants in each country. However cans can also be imported from other Rexam plants or from alternative suppliers in the region. In the case of glass bottles, in Chile, we purchase most of our bottles from a single local supplier, Cristalerias Chile, although there are other glass suppliers in Chile from whom we can purchase and we also import from other suppliers. For Malt we have long term contracts in Chile and in Argentina where we purchase our requirements from Cargill which has two plants in the country. While we have alternatives in procuring our supplies, if we experience disruptions in our supply chain we may not be able to obtain replacement supplies at favorable pricing or advantageous terms, which may adversely affect our results. In the case of one way polyethylene terephthalate resins (“PET”), we purchase from several suppliers located in China, Mexico and the U.S. and in the past we have also bought from Argentina. For hotfill PET, we purchase from Mexico (Indorama).

 

Water supply is essential to the development of our businesses.

 

Water is an essential component for beer, soft drinks, mineral and purified water. While we have adopted policies for the responsible and sustainable use of water, a failure in our water supply could negatively affect our sales and profitability.

 

The supply, production and logistics chain is key to the timely supply of our products to consumer centers.

 

Our supply, production and logistics chain is crucial for the delivery of our products to consumer centers. An interruption or a significant failure in this chain may negatively affect our results, if the failure is not quickly resolved.  An interruption in the chain could be caused by various factors, such as strikes, riots or other factors which are beyond our control.

 

If we are unable to protect our information systems against data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

  

We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for digital marketing activities and electronic communications among us and our clients, suppliers and also among our subsidiaries. Security breaches of this infrastructure can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent such breaches, our operations could be disrupted, or we may suffer financial damage or loss because of lost or misappropriated information.

 

Possible restrictions on the sale and promotion of alcoholic beverages and other food products in Chile could adversely affect us.

 

Senators and congressmen from different political parties have submitted to the Chilean congress proposed bills to restrict the consumption, sale and promotion of alcoholic beverages.  The principal modifications proposed in these bills are the incorporation of warnings on product labels of the possible dangers of excessive alcohol consumption on human health, similar to those required in the United States, restrictions on television advertising and a prohibition of alcoholic beverages at sports, cultural or related events.

  

On March 15, 2012 law 20,580 was enacted by the Chilean congress. This law amended the limit for blood alcohol content while driving reducing the limit from less than 0.5 gr/lt to less than 0.3 gr/lt., which has already had an impact on the level of consumption of alcoholic beverages and consequently our business.

 

If further proposed bills are passed, or other regulations restricting the sale of non-alcoholic beverages or sweet snacks are enacted, this could affect consumption of our products and, as a consequence, negatively impact our business.

 

Our production activities depend on our ability to comply with environmental regulations, which may become more stringent in the future and negatively affect our profitability.

The regulation of matters relating to the protection of the environment is not as well developed in Chile and Argentina as in the United States and certain other countries. Accordingly, we anticipate that additional laws and regulations will be enacted over time in these countries with respect to environmental matters. If public authorities issue new and stricter standards, or enforce or interpret existing laws and regulations in a more restrictive manner, we may be forced to make expenditures to comply with such new rules, which could result in higher overall production costs and negatively affect our profitability.

 

 

 

Our businesses are taxed with different duties, particularly with excise taxes on the consumption of alcoholic and non-alcoholic beverages.

 

The Argentine excise tax is 8.7% for beer, and the Chilean excise tax is 15% for beer and wine, 27% for spirits, and 13% for carbonated softdrinks beverages and nectars and juices. An increase in the rate of these or any other tax could negatively affect our sales and profitability.

 

Chilean peso fluctuations may affect our profitability.

 

Because we purchase some of our supplies at prices set in U.S. dollars, and export wine in U.S. dollars, euros and pounds, we are exposed to foreign exchange risks that may adversely affect our financial condition and results of operations.  Therefore, any future changes in the value of the Chilean peso against said currencies would affect the revenues of our wine export business, as well as the cost of several of our raw materials, especially in the beer and soft drink businesses where raw materials are purchased in U.S. dollars. The effect of the exchange rate variation on export revenues would have an inverse effect on the cost of raw materials expressed in Chilean peso terms.

 

Catastrophic events in the markets in which we operate could have a material adverse effect on our financial condition.

  

Natural disasters, climate change, terrorism, pandemics, strikes or other catastrophic events could impair our ability to manufacture, distribute or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to manage such events effectively if they occur, could adversely affect our sales volume, cost of raw materials, earnings and financial results. For example, on February 27, 2010, an 8.8 magnitude earthquake struck central Chile, followed by a subsequent tsunami. The earthquake epicenter was located 200 miles southwest of Santiago and 70 miles north of Concepción, Chile’s second largest city. A future earthquake, tsunami or other natural disaster could have a significant effect on our business, results of operations and financial condition. See “Item 5: Operating and Financial Review and Prospects—Overview—Impact of the February 27, 2010 Earthquake and Tsunami.”

 

If we are unable to maintain the image and quality of our products our financial results may suffer.

 

The image and quality of our products is essential for our success and growth. Problems with product quality could tarnish the reputation of our products and may adversely affect our revenues.

 

If we are unable to finance our operations we may be adversely affected.

 

A global liquidity crisis or an increase in financial interest rates may eventually limit our ability to obtain the cash needed to fulfill our commitments. Sales could also be affected by a global disruption if consumption decreases sharply, placing stress on our cash position.

 

 

RISKS RELATING TO OUR ADSs

 

The price of our ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in exchange conditions.

 

Our ADSs trade in U.S. dollars.  Fluctuations in the exchange rate between Chilean and Argentine currencies and the U.S. dollar are likely to affect the market price of our ADSs.  For example, since our financial statements are reported in Chilean pesos, a decline in the value of the Chilean peso against the dollar would reduce our earnings as reported in U.S. dollars.  Any dividend we may pay in the future would be denominated in Chilean pesos.  A decline in the value of the Chilean peso against the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.  Additionally, in the event of a dividend or other distribution, if exchange rates fluctuate during any period of time when the ADS depositary cannot convert a foreign currency into dollars, a holder of our ADSs may lose some of the value of the distribution.  Also, since dividends in Chile are subject to withholding taxes, which we retain until the following year when the exact amount to be paid is determined, if part of the retained amount is refunded to the shareholders, the amount received by holders of our ADSs would be subject to exchange rate fluctuations between the two dates.

 

 

A holder of ADSs may be subject to certain risks due to the fact that holders of our ADSs do not hold shares of our common stock directly.

 

In order to vote at shareholders’ meetings, if a holder is not registered on the books of the ADS depositary, the holder of our ADSs is required to transfer its ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the ADS depositary.  Any ADSs transferred to this blocked account will not be available for transfer during that time.  If a holder of our ADSs is registered on the books of the ADS depositary, it must give instructions to the ADS depositary not to transfer its ADSs during this period before the shareholders’ meeting.  A holder of our ADSs must therefore receive voting materials from the ADS depositary sufficiently in advance in order to make these transfers or give these instructions. There can be no guarantee that a holder of our ADSs will receive voting materials in time to instruct the ADS depositary how to vote.  It is possible that a holder of our ADSs will not have the opportunity to exercise a right to vote at all.  Additionally, a holder of our ADSs may not receive copies of all reports from us or the ADS depositary.  A holder of our ADSs may have to arrange with the ADS depositary’s offices to inspect any reports issued.

 

Controls on foreign investment and repatriation of investments in Chile may adversely impact a holder of our ADSs ability to obtain and dispose of the shares of our common stock underlying its ADRs.

 

Equity investments in Chile by persons who are not Chilean residents are generally subject to exchange control regulations that restrict the repatriation of investments and earnings from Chile.  Our ADSs are subject to an ADR foreign investment contract among us, the depositary and the Central Bank of Chile, which is intended to grant holders of our ADSs and the depositary access to Chile’s formal exchange market.  See “Item 3: Key Information-Selected Financial Data-Exchange Rates.”  Pursuant to current Chilean law, our ADR foreign investment contract may not be amended unilaterally by the Central Bank of Chile.  However, we cannot assure you that additional Chilean restrictions applicable to holders of our ADSs, the disposition of underlying shares of our common stock or the repatriation of the proceeds from the disposition of the underlying common stock could not be imposed in the future, nor can we assess the duration or impact of the restrictions if imposed.  If for any reason, including changes to our ADR foreign investment contract or Chilean law, the depositary is unable to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions in Chilean pesos.  Transferees of shares of our common stock withdrawn from the ADR facility will not be entitled to access the formal exchange market unless the withdrawn shares are redeposited with the depositary.  See “Item 10: Additional Information – Exchange Controls in Chile.”

 

The rights of a holder of our ADSs to force us to purchase its underlying shares of our common stock pursuant to Chilean corporate law upon the occurrence of certain events may be limited.

 

In accordance with Chilean laws and regulations, any shareholder that votes against certain corporate actions or does not attend the meeting at which certain corporate actions are approved and communicates to the corporation its dissent in writing within the time period established by law may exercise a withdrawal right, tender its shares to the company and receive cash compensation for its shares, provided that the shareholder exercises its rights within the prescribed time periods.  See “Item 10: Additional Information – Memorandum and Articles of Association – Rights, preferences and restrictions regarding shares.”  In our case, the actions triggering a right of withdrawal include the approval of:

 

·         our transformation into a different type of legal entity;

·         our merger with and/or into another company;

·         the transfer of 50% or more of our corporate assets, whether or not liabilities are also transferred, to be determined according to the balance sheet of the previous fiscal year, or the proposal or amendment of any business plan that contemplates the transfer of assets exceeding said percentage; the disposition of 50% or more of the corporate assets of a subsidiary, which represents at least 20% of the assets of the corporation, as well as any disposition of shares which results in the parent company losing its status as controller;

 

·         the granting of real or personal guarantees to secure third-party obligations exceeding 50% of the corporate assets except when the third party is a subsidiary of the company (in which case approval of the board of directors will suffice);

·         the creation of preferences for a series of shares or the increase, extension or reduction in the already existing ones.  In this case, only dissenting shareholders of the affected series shall have the right to withdraw;

·         curing certain formal defects in our charter which otherwise would render it null and void or any modification of our by-laws that grant this right; and

·         other cases provided for by statute or in our bylaws, if any.

 

In addition, shareholders may withdraw if a person becomes the owner of two-thirds or more of the outstanding shares of the corporation as a consequence of a share acquisition and such person does not make a tender offer for the remaining shares within 30 days from the date of such acquisition.

 

Minority shareholders are also granted the right to withdraw when the controller acquires more than 95% of the shares of an open stock corporation.

 

Our bylaws do not provide for additional circumstances under which shareholders may withdraw.

 

Because of the absence of legal precedent as to whether a shareholder that has voted both for and against a proposal, such as the depositary of our ADSs, may exercise withdrawal rights with respect to those shares voted against the proposal, there is doubt as to whether a holder of ADSs will be able to exercise withdrawal rights either directly or through the depositary for the shares of our common stock represented by its ADSs.  Accordingly, for a holder of our ADSs to exercise its appraisal rights, it may be required to surrender its ADRs, withdraw the shares of our common stock represented by its ADSs, and vote the shares against the proposal.

 

Preemptive rights to purchase additional shares of our common stock may be unavailable to holders of our ADSs in certain circumstances and, as a result, their ownership interest in us may be diluted.

 

The Ley sobre Sociedades Anónimas N° 18,046 and the Reglamento de Sociedades Anónimas, which we refer to in this document collectively as the “Chilean Corporations Act”, requires us, whenever we issue new shares for cash, to grant preemptive rights to all holders of shares of our common stock, including shares of our common stock represented by ADSs, giving those holders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  We may not be able to offer shares to holders of our ADSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless a registration statement under the Securities Act is effective with respect to those rights and shares, or an exemption from the registration requirements of the Securities Act is available.

 

We intend to evaluate at the time of any future offerings of shares of our common stock the costs and potential liabilities associated with any registration statement as well as the indirect benefits to us of enabling U.S. owners of our ADSs to exercise preemptive rights and any other factors that we consider appropriate at the time, before making a decision as to whether to file such a registration statement.  We cannot assure you that any such registration statement would be filed.

 

To the extent a holder of our ADSs is unable to exercise its preemptive rights because a registration statement has not been filed, the depositary will attempt to sell the holder’s preemptive rights and distribute the net proceeds of the sale, net of the depositary’s fees and expenses, to the holder, provided that a secondary market for those rights exists and a premium can be recognized over the cost of the sale.  A secondary market for the sale of preemptive rights can be expected to develop if the subscription price of the shares of our common stock upon exercise of the rights is below the prevailing market price of the shares of our common stock. Nonetheless, we cannot assure you that a secondary market in preemptive rights will develop in connection with any future issuance of shares of our common stock or that if a market develops, a premium can be recognized on their sale.  Amounts received in exchange for the sale or assignment of preemptive rights relating to shares of our common stock will be taxable in Chile and the United States.  See “Item 10: Additional Information – Taxation – Chilean Tax Considerations – Capital Gains” and “– United States Tax Considerations – Capital Gains.”  If the rights cannot be sold, they will expire and a holder of our ADSs will not realize any value from the grant of the preemptive rights.  In either case, the equity interest of a holder of our ADSs in us will be diluted proportionately.

 

ITEM 4: Information on the Company

 

History and Development of the Company

 

Our current legal and commercial name is Compañía Cervecerías Unidas S.A.. We were incorporated in the Republic of Chile in 1902 as an open stock corporation, following the merger of two existing breweries, one of which traces its origins back to 1850, when Mr. Joaquín Plagemann founded one of the first breweries in Chile in the port of Valparaíso.  By 1916, we owned and operated the largest brewing facilities in Chile.  Our operations have also included the production and marketing of soft drinks since the beginning of the last century, the bottling and selling of mineral water products since 1960, the production and marketing of wine since 1994, the production and marketing of beer in Argentina since 1995, the production and marketing of pisco since 2003, the production and marketing of sweet snacks products since 2004 and the production and marketing of rum since 2007.

 

We are subject to a full range of governmental regulation and supervision generally applicable to companies engaged in business in Chile and Argentina.  These regulations include labor laws, social security laws, public health, consumer protection and environmental laws, securities laws, and anti-trust laws.  In addition, regulations exist to ensure healthy and safe conditions in facilities for the production and distribution of beverages and sweet snacks products.

 

Our principal executive offices are located at Vitacura 2670, Santiago, Chile. Our telephone number in Santiago is (56-2) 2427-3000, our fax number is (56-2) 2427-3333 and our website is www.ccu.cl. Our authorized representative in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19715, USA, telephone number (302) 738-6680 and fax number (302) 738-7210.  The information on our website is not incorporated by reference into this document.

 

In 1986, IRSA, our current principal shareholder, acquired its controlling interest in us through purchases of common stock at an auction conducted by a receiver who had assumed control of us following the economic crisis in Chile in the early 80’s, which resulted in our inability to meet our obligations to our creditors.  IRSA, at that time, was a joint venture between Quiñenco S.A. (“Quiñenco”) and the Schörghuber Group from Germany through its wholly owed subsidiary Finance Holding International B.V. (“FHI”) of the Netherlands.

 

To our knowledge, none of our common stock is currently owned by governmental entities.  Our common stock is listed and traded on the principal Chilean stock exchanges.  See “Item 7: Major Shareholders and Related Party Transactions.”

 

In September 1992, we issued 4,520,582 ADSs, each representing five shares of our common stock, in an international American Depositary Receipt (“ADR”) offering.  The underlying ADSs were listed and traded on the NASDAQ, until March 25, 1999.  Since that date, the ADSs have been listed and traded on the NYSE.  On December 20, 2012, the ratio of ADSs to shares of common stock was changed from 1 to 5, to a new ratio of 1 to 2.

 

In 1994, we diversified our operations both in the domestic and international markets.  In that year, we purchased a 48.4% interest in the Chilean wine producer Viña San Pedro S.A. (“VSP”, today, “VSPT”). Since December 31, 2008, that interest amounts to 50.0%.  In November 1994, we and Buenos Aires Embotelladora S.A. (“BAESA”), (the PepsiCo bottler in Chile at that time) merged to create Embotelladoras Chilenas Unidas S.A. (“ECCUSA”), for the production, bottling, distribution and marketing of soft drinks and mineral water products in Chile.  In November 1999, we purchased BAESA’s interest in ECCUSA and thereafter have controlled 100% of that company.

 

 

Through CCU Argentina, we began our expansion into Argentina by acquiring an interest in two Argentine breweries: 62.7% of the outstanding shares of Compañía Industrial Cervecera S.A. (“CICSA”), was acquired during January and February 1995 and 98.8% of the outstanding shares of Cervecería Santa Fe S.A. (“CSF”), was acquired in September 1995.  In 1997, CCU Argentina increased its interest in CICSA to 97.2% and in CSF to 99.9% through the purchase of non-controlling interests.  In January 1998, we decided to merge these two breweries into one company operating under the name of CICSA.  Following the merger, CCU Argentina’s interest in CICSA was 99.2%.  In April 1998, CCU Argentina completed the purchase of the brands and assets of Cervecería Córdoba for US$8 million.  After subsequent capital increases, the last one in June 2008, our interest in CCU Argentina reached 95.9%, with Anheuser-Busch Incorporated’s (“Anheuser-Busch”) interest at 4.1%.

 

In addition to our acquisitions in Argentina, we signed a license agreement with Anheuser-Busch in 1995 granting us the exclusive right to produce, market, sell and distribute the Budweiser beer brand in Argentina. In 2008 the license agreement was extended until December 31, 2025.

 

After a capital increase approved by our shareholders in October 1996, we raised approximately US$196 million between December 1996 and April 1999.  Part of this capital expansion was accomplished between December 1996 and January 1997 through our second ADR offering in the international markets.

 

During 2000, VSPT, through its subsidiary Finca La Celia S.A. (“FLC”), acquired the winery Finca La Celia in Mendoza, Argentina, initiating its international expansion, allowing VSPT to include fine quality Argentine wines into its export product portfolio.

 

To increase our presence in the premium beer segment, we acquired in November 2000 a 50% stake in Cervecería Austral S.A., located in the city of Punta Arenas, with an annual production capacity of 6.1 million liters.  Further, in May 2002, we acquired a 50% stake in Compañía Cervecera Kunstmann S.A., located in the city of Valdivia.

 

In February 2003, we began the sale of a new product for our beverage portfolio, pisco, under the brand Ruta Norte.  Pisco is a grape spirit very popular in Chile that is produced in the northern part of the country and the southern part of Peru.  Our pisco, at that time, was only produced in the Elqui Valley in Region IV of Chile and was sold throughout the country by our beer division sales force.  In March 2005, we entered into an association with the second-largest pisco producer at that time, Cooperativa Agrícola Control Pisquero de Elqui y Limarí Ltda. (“Control”).  This new joint venture was named Compañía Pisquera de Chile S.A. (“CPCh”), to which the companies contributed principally with assets, commercial brands and – in the case of Control – also some financial liabilities.  Currently we own 80% of CPCh and Control owns the remaining 20%.

 

On April 17, 2003, the Schörghuber Group, at the time an indirect owner of 30.8% of our ownership interest, gave Quiñenco, also at the time an indirect owner of 30.8% of our ownership interest, formal notice of its intent to sell 100% of its interest in FHI to Heineken Americas B.V., a subsidiary of Heineken International B.V.  As a result of the sale, Quiñenco and Heineken Americas B.V., the latter through FHI, became the only two shareholders of IRSA, the owner of 61.6% of our equity at that time, each with a 50% interest in IRSA.  Heineken International B.V. and FHI subsequently formed Heineken Chile Ltda., to hold the latter’s 50% interest in IRSA.  Therefore, Quiñenco and Heineken Chile Ltda. are the only two current shareholders of IRSA, with a 50% equity each.  On December 30, 2003, FHI merged into Heineken Americas B.V., which together with Heineken International B.V. remained as the only shareholders of Heineken Chile Ltda. At present IRSA owns, directly and indirectly, 66.11% of our equity.

 

In August 2003, VSPT formed Viña Tabalí S.A., a joint venture in equal parts with Sociedad Agrícola y Ganadera Río Negro Ltda., for the production of premium wines.  This winery is located in the Limarí Valley, Chile’s northernmost winemaking region, which is noted for the production of outstanding wines.  In January 2007, Viña Tabalí S.A. bought the assets of Viña Leyda, located in the Leyda Valley, a new winemaking region south of Casablanca Valley and close to the Pacific Ocean.  Viña Leyda produces excellent wines that have won awards in different international contests.  After this acquisition, Viña Tabalí S.A. changed its name to Viña Valles de Chile S.A.

 

 

In January 2004, we entered the sweet snacks business by means of a joint venture between our subsidiary ECCUSA and Industria Nacional de Alimentos S.A, a subsidiary of Quiñenco, with a 50% interest each in Calaf S.A. (which has been renamed Foods Compañía de Alimentos S.A., or “Foods”), a corporation that acquired the trademarks, assets and know-how, among other things, of Calaf S.A.I.C. and Francisca Calaf S.A., traditional Chilean candy makers, renowned for more than a century.

 

In December 2006, we signed a joint venture agreement with Watt’s S.A. (“Watt’s”), a local fruit related company, under which we participate in equal parts in Promarca S.A. (“Promarca”).  This new company owns the brands “Watt’s,” “Ice Frut de Watt’s,” “Yogu Yogu” and “Shake a Shake” in Chile.  Promarca granted its subsidiaries, for an indefinite period, the exclusive licenses for the production and sale of the different product categories.  Therefore, we now participate in new product categories such as 100% fruit juices and fruit, soy and dairy based beverages.

 

In May 2007, CPCh entered the rum market with our proprietary brand Sierra Morena and later, in 2008, added new rum brand extensions and introduced various pisco based cocktails. Its most successful one, Campanario Mango Sour, is now sold in some states in the U.S. market through Wal-mart stores under the name of “Carillon Mango.” 

 

In December 2007, we entered into an agreement with Nestlé Chile S.A. and Nestlé Waters Chile S.A., the latter of which acquired a 20% interest in our subsidiary Aguas CCU-Nestlé Chile S.A. (“Aguas CCU”), the company through which we develop our bottled water business in Chile.  As part of this new association, Aguas CCU introduced in 2008 the Nestlé Pure Life brand in Chile.  Nestlé had a call option to increase its ownership in Aguas CCU by an additional 29.9%, which expired on June 5, 2009. On June 4, 2009 ECCUSA received a notification from Nestlé Waters Chile S.A. exercising its irrevocable option to buy 29.9% of Aguas CCU equity, within the scope of the association contract. The completion of the deal represented a profit before taxes for ECCUSA of CLP24,439 million. On September 30, 2009 in extraordinary shareholders’ meetings, Aguas CCU and Nestlé Waters Chile S.A. (“Waters Chile”) approved the merger of Waters Chile and Aguas CCU. The present shareholders of Aguas CCU are ECCUSA (50.10%), Nestlé Chile S.A. (49.401%) and Comercializadora de Productos Nestlé S.A. (0.499%).

 

In April 2008, we bought the Argentine brewer ICSA after receiving the approval of the Argentine antitrust authorities.  ICSA owns, among other assets, the Bieckert, Palermo and Imperial beer brands, which together represented approximately 5.8% of the Argentine beer market, and a brewery in Luján, Buenos Aires, with a nominal production capacity of 270 million liters per year.

 

In August 2008, Foods bought 50% of Alimentos Nutrabien S.A., a company specializing in muffins and other high quality home-made products. The Nutrabien brand complements our sweet snacks portfolio which includes the Calaf and Natur brands, the latter acquired in 2007. Moreover, with this acquisition we expanded the sweet snacks business from the traditional candy category to the nutritional cereal bars, cookies and muffins categories.

 

In November 2008, CCU and its affiliate VSP entered into a Merger Agreement with Compañía Chilena de Fósforos and its subsidiaries Terciados y Elaboración de Maderas S.A. and Viña Tarapacá S.A. (“VT”), in order to merge VT into VSP. Under the terms of the Merger Agreement, and prior to its execution, CCU had to acquire 25% of VT’s equity. Once all the legal requirements were fulfilled, the merger by absorption of VT by VSP was completed on December 9, 2008, with an effective date for accounting purposes of October 1, 2008. The affiliate was renamed Viña San pedro Tarapacá S.A. (“VSPT”).

 

In December 2010, our subsidiary Invex CCU Ltda. acquired a 4.04% equity interest in CCU Argentina from Anheuser-Busch Investment S.L. As a result, CCU became the sole equity holder of CCU Argentina. This transaction had no effect on the Budweiser brand production and distribution contract which expires in 2025 (in 2015 for the distribution of the brand in Chile).

 

In December 2010, CCU and CICSA entered into the cider business by acquiring, directly and indirectly, controlling interests in Sáenz Briones S.A. and Sidra La Victoria S.A., two Argentinian companies engaged in the cider business.

 

 

In December 2011, the joint venture Viña Valles de Chile S.A. (“VDC”) was split and the Viña Leyda assets remained in VDC. After a shares swap VDC became a 100% directly and indirectly controlled subsidiary of VSPT.

 

In December 2011, our subsuidiary Compañía Pisquera de Chile S.A. (“CPCh”) signed a licence agreement for the commercialization and distribution in Chile of the pisco brand Bauzá. In addition, CPCh acquired 49% of the licensor company Compañía Pisquera Bauzá S.A., owner of the brand in Chile.

 

In September 2012, CCU acquired 100% shares of the Uruguayan companies Marzurel S.A., Milotur S.A., and Carolina S.A. and became the majority shareholder and controller of Andrimar S.A.. These companies own the assets of a business developed in Uruguay engaged in the production and marketing of bottled mineral waters under the Nativa brand, and carbonated softdrinks under the Nix brand.

In December 2012, the subsidiary Aguas CCU-Nestlé Chile S.A. completed an acquisition of 51% of the company Manantial S.A., an “HOD”, Home and Office Delivery, business of purified water in bottles with the use of dispensers. The partnership will enable Aguas CCU-Nestlé Chile S.A. to participate in a new business category, of which until today the company has had a very small presence.  

Furthermore, in 2012, CCU increased its stake in VSPT to 60.45% by acquiring an additional 10.45% of the outstanding shares, as a financial investment opportunity.

 

CAPITAL EXPENDITURES

The capital expenditures figures for the last three years shown below reconcile to the Cash Flow statement as shown in the Consolidated Statements of Cash Flows.

 

Our capital expenditures for the last three years were CLP64,396 million, CLP77,847 million and CLP117,645 million, respectively, totaling CLP259,888 million, of which CLP75,655 million were invested in our beer operations in Chile, CLP50,422 million in our Argentine beer operations, CLP57,765 million in our non-alcoholic beverages operations, CLP21,562 million in our wine operations, CLP3,702 million in our spirits operations and CLP50,782 in other investments, mostly in warehouses and bottle molds, during the years mentioned above.

 

In recent years, our capital expenditures have been made primarily for the expansion of our production and bottling capacities, distribution chain enhancement, additional returnable bottles and crates, marketing assets (primarily coolers), environmental improvements and updating our management information systems, among others.

 

In 2010, a third of our capital expenditures were focused on our Chile beer division’s machinery and equipment in order to further increase its production capacity and to enhance the filtering and bottling processes. Significant amounts of our capital expenditures were also incurred in the non-alcoholic beverage division, representing approximately 19% of the total capital expenditures, principally focused on equipment, packaging and marketing assets. These investments were required to address the sales volume increase experienced in 2009. For the same reason, important investments were made in our Argentina beer division’s bottling and packaging, marketing assets and equipment.

 

During 2011, we dedicated 30% of our capital expenditure to the Chile beer division, with a significant amount invested in environmental enhancement in addition to the necessary investments in packaging and machinery and equipment. A major item in which CCU invested in the Beer Argentina and Non-alcoholic beverage divisions was packaging, after dedicating the necessary resources to replace and increase the production capacity. The resources dedicated to enlarge our warehouses network amounted to 10% of the total 2011 capital expenditure.

 

During 2012, we dedicated 24% of our capital expenditure to the non-alcoholic beverages and 22.9% to CCU Argentina. These investments were necessary to support the increase of the sales volume experienced during 2011. Also our Chile beer division required significant investments to increase bottling capacity, new packaging, and marketing assets. It was also necessary to invest in the construction of new warehouses throughout Chile in order to optimize the distribution network of all our products. The 2012 breakdown by the main concepts are principally Machinery and equipment representing 41.6%, Packaging with 19.6% and Marketing assets with 9.9%.

 

Table of Contents

 

Our principal capital expenditures for the period 2010-2012 are displayed in the following table. See “Item 5: Operating and Financial Review and Prospects-Liquidity and Capital Resources- Capital Expenditures Commitments” for the period 2013-2016.

 

 

 

 

Business Overview

 

Summary

CCU is a diversified beverage company operating principally in Chile, Argentina and Uruguay. CCU is the largest Chilean brewer, the second-largest Argentine brewer, the second-largest Chilean soft drink producer, the second-largest Chilean wine producer, the largest Chilean mineral water and nectars producer, the largest pisco distributor and also participates in the HOD, rum and confectionery industries in Chile. The Company has licensing agreements with Heineken Brouwerijen B.V., Anheuser-Busch Incorporated, PepsiCo Inc., Paulaner Brauerei AG, Schweppes Holdings Limited, Guinness Brewing Worldwide Limited, Société des Produits Nestlé S.A., Pernod Ricard and Compañía Pisquera Bauzá S.A.. According to Paulaner’s global strategy of producing only Paulaner beer in Germany, the Licence agreement will end in June 2013. We are currently in the evaluation process to import it.

 

In 2012, we had consolidated net sales of CLP1,075,690 million broken down by segment as per the following schedule:

 

  

Beer Chile. We estimate that our share of the Chilean beer market by volume was approximately 83% in 2010, 80% in 2011 and 79% in 2012.  Our line of beers in Chile includes a full range of super-premium, premium, medium-priced and popular-priced brands of alcoholic and non-alcoholic beer, which are primarily marketed under twelve different proprietary brands and four licensed brands. Our flagship brand, Cristal, is Chile’s best selling beer, accounting for an estimated 43.5% of our 2012 beer sales by volume in Chile.  We are the only brewery in Chile with a nationwide production and distribution network. In addition, we are the exclusive producer and distributor in Chile of Heineken beer, the exclusive distributor in Chile of imported Budweiser beer and the exclusive local producer and importer of Paulaner beer.  We also distribute and produce, under license, Austral beer.

 

CCU Argentina.

-         Beer Argentina: We entered the Argentine beer market in 1995 by acquiring two breweries and their brands, CICSA and CSF.  Under a joint venture agreement entered into with Anheuser-Busch in 1995, we began importing, selling and distributing Budweiser beer in Argentina in March 1996.  We began production and distribution of locally produced Budweiser beer in Argentina in December 1996. Additionally, in 1998, we bought the brands and assets of Cervecería Córdoba.  In April 2008, we bought ICSA and as a result added to our portfolio the brands Palermo, Bieckert and Imperial. In addition, we are the exclusive producer and distributor in Argentina of Heineken beer and the exclusive distributor in Argentina of imported Corona, Kunstmann, Negra Modelo, Birra Moretti, Paulaner and Guinness beer brands. We estimate that our market share by volume of the Argentine beer market remained consistent at approximately 23% in 2010, 2011 and 2012.

 

-         Cider and other spirits: In December 2010, CICSA, our subsidiary in Argentina, acquired control of Sáenz Briones and Sidra La Victoria, entering the cider and spirits businesses in that country. These two operations are the largest in a very fragmented market and own traditional, well-recognized brands. The most important cider and spirits brands are Real, La Victoria, Saenz Briones 1888 and in spirits, El Abuelo. According to Nielsen, our cider market share was 34.9% in 2012.

 

 

Non-alcoholic beverages.  We produce and sell carbonated soft drinks, bottled water and HOD (Home and Office delivery), nectars and juices, sports and energy drinks and tea products in Chile, including our proprietary brands and brands produced under license from PepsiCo, Schweppes Holdings Ltd., Promarca, Nestlé Chile S.A. and Manantial S.A. The most relevant beverages in this segment are soft drinks: carbonated beverages (both cola and non-cola) and non-carbonated beverages, mostly fruit juices in different degrees of concentration. We also produce various types of water products including mineral water (both, sparkling and still), purified water and HOD. According to Nielse, our Chilean carbonated soft drinks market share by volume was approximately 24.3% in 2010, 24.8% in 2011, and 25.2% in 2012, and our Chilean water market share was 52.9% in 2010, 50.6% in 2011 and 52.0% in 2012.

 

Wine.   We entered the Chilean wine industry in 1994 with the acquisition of a 48.4% interest in VSP (today VSPT), Chile’s third-largest player in the domestic market and second-largest wine exporter. After making subsequent investments and pursuant to the merger of VSP and VT, resulting in VSPT, our affiliate CCU Inversiones S.A. currently has a 60.45% interest in VSPT. VSPT is composed of six different wineries in Chile and one in Argentina. In 2011 VSPT merged Bodega Tamari into Finca La Celia, both vineyards located in Mendoza, Argentina.. In addition, in December 2011, Viña Valles de Chile, a former non-consolidating subsidiary, was split and VSPT remained 100% owner of the resulting new vineyard of the same name. Therefore, we began consolidating the results of Viña Valles de Chile in December 2011. The wine group produces and markets a full range of wine products for both the domestic and export markets.  According to Nielsen, in 2012, VSPT’s sales by volume amounted to approximately 26.7% of total measured domestic industry sales in Chile by volume and 13.1% of Chile’s total wine export sales by volume, excluding bulk wine. VSPT’s principal vineyards are located in all principal viticulture Chilean valleys, including Maipo, Curicó, Casablanca, Leyda, Colchagua, Elqui, Cachapoal and Maule valleys, and in Argentina, VSPT’s vineyards are located in Mendoza’s valley.  VSPT’s domestic wine products are distributed through our nationwide distribution system with dedicated sales forces in several major cities, and its export products are sold in 88 different countries through distribution agents.

 

Spirits.  In February 2003, we began the sale of pisco, under the brand Ruta Norte. Pisco is a distilled wine spirit produced in the northern regions of Chile and the southern regions of Peru. In March 2005, we entered into an association with the second-largest pisco producer in Chile creating a new entity (CPCh) to which both companies contributed principally assets and commercial brands. Currently we own 80% of CPCh. According to Nielsen, CPCh had a 51.6% market share of the Chilean pisco industry in 2012.  In May 2007, CPCh entered the rum category with the brand Sierra Morena. We ended the year 2012 with a rum market share of 20.7%  according to Nielsen. In July 2011, CPCh begun the distribution of Pernod Ricard products through the traditional channels introducing, among other brands, Havana Club, Ballantine’s, Absolute, Chivas Regal, and Beefeater. In the last quarter of 2011 the Company entered into a license contract to distribute the Bauzá premium pisco brand, which complements the Company’s portfolio of premium brands. In addition, it acquired 49% of the licensor, Compañía Pisquera Bauzá S.A..

 

Other businesses

    

Distribution Network.   In Chile, we have an extensive and integrated distribution network for the sale and distribution of beer, soft drinks, mineral water, purified water, functional beverages, nectars, wine, pisco, rum whiskey, vodka and sweet snacks products with capacity to reach approximately 115,179 points of sale. The network includes a total of 23 owned or leased warehouses and a network of independent transportation companies handled by Transportes CCU. Sales are performed by category-specific sales forces and by Comercial CCU S.A. (“Comercial CCU”) which has a sales force of approximately 371 people who sell our products to approximately 37,085 customers in the North of Chile from Arica to Copiapó/Vallenar and in the mid-south area from Curicó/Talca through Coyhaique, except for Concepción and San Fernando City. In the far south of Chile, in Punta Arenas, Comercial Patagona does the selling for all products, reaching 819 customers. In the central parts of the country and the City of Concepción, there are dedicated sales forces that focus on single lines of products. Product distribution is carried out by Transportes CCU throughout the country or by Comercial Patagona in its territory.

 

In Argentina we have the capacity to reach 152,125 points of sales. Our sales and distribution network for our beer products consists of seven owned or leased warehouses, a direct sales force and 15 logistics operators reaching approximately 94,598 customers plus 73 supermarket chains. Sales are done by two independent bottlers in the south and north of Argentina. 

 

 

Uruguay

 

In September 2012, CCU acquired 100% of the shares of the Uruguayan companies Marzurel S.A., Milotur S.A., Coralina S.A. and became the majority shareholder and controller of Andrimar S.A.. These companies own the assets of a business developed in Uruguay engaged in the production and marketing of bottled mineral waters under the Nativa brand, and carbonated softdrinks under the Nix brand. This acquisition is in line with the Company’s strategic plan, which seeks to expand its activities into new markets.

 

 

Our Beer Business in Chile

 

Our historical core business, our Chilean beer operation, was first established in 1850.  Since that date, our management believes we have played a leading role in the industry, with a business that in 1902, after the merger of different breweries, gave rise to our formation. 

 

Overview.  We estimate that annual beer consumption in Chile was 693 million liters in 2012 or approximately 40 liters per capita.  The following chart shows our estimates for total and per capita consumption levels for beer in Chile for the years 2008 - 2012:

 

 

We estimate that the total beer market increased by approximately 2.9% in terms of volume sold during 2012 as compared to 2011, after growing an average of 3.6% per year between 2008 and 2012. We believe that the positive growth of the beer market in the period of five years is the result of the actions taken by us since 2001 to increase beer consumption in Chile with new products, new packaging and by consumption occasions, in addition to positive Chilean economic conditions. The market decreased in 2009 primarily a result of the effects of the global financial crisis in Chile, which led to increased unemployment and decreased consumption. After the February 27, 2010 earthquake, the unemployment rate decreased from 9.1% to 7.1% thereby increasing consumption and resulting in a 4.4% total sales volume increase in the beer market. CCU’s sales volume grew only by 1.5%, less than the total market growth rate of 4.4%, due to the temporary lack of product supply after the Santiago brewery plant was damaged by the earthquake. Although we were able to resume production activities within a month after the earthquake, this period of inactivity gave an advantage to other market players. The 6.0% Chilean economic growth in 2011 and 5.6% in 2012 and the consequent high employment rates are the basis for the vigorous beer industry increase.

 

There are three principal Chilean manufacturers: us, Cervecería Chile and Cervecería Austral, whose principal brands of beer in Chile are Cristal, Becker and Austral, respectively.  According to our estimates, during 2012, we and Cervecería Chile accounted for approximately 79%  and 14%  of total beer sales in Chile, respectively.  In November 2000, we acquired a 50% stake in Cervecería Austral, located in the city of Punta Arenas.  This brewery has an annual nominal production capacity of 7.1 million liters and had less than 1% market share during 2012.  In October 2001, Cervecería Austral entered into a license agreement with our subsidiary CCU Chile to produce and sell our brand Cristal, as well as any other brand owned by or licensed to CCU Chile in the southern part of Chile.  During 2003, Cervecería Austral began the production and sale of our brands Cristal, Escudo and Dorada. In May 2002, we acquired a 50% stake in Compañía Cervecera Kunstmann S.A., located in the city of Valdivia. In November 2006, we acquired additional shares of Kunstmann that allowed us to consolidate this subsidiary into our financial statements since that month. Sales of imported beer represent an estimate of 7%  and microbreweries account for 0.7%  of the total beer industry volume in 2012.

 

 

Wholesale and retail beer prices are not regulated in Chile.  Wholesale prices are subject to negotiation between the producer and the purchaser.  Retailers determine retail prices to the final consumer.  We believe that the key factors determining retailers’ prices include: national and/or local price promotions offered by the manufacturer, the nature of product consumption (on-premise or take-out), the type of packaging (returnable or non-returnable), the applicable tax structure, the desired profit margins and the geographical location of the retailer.

 

Beer Production and Marketing in Chile.   The production, marketing and sales of beer in Chile are our principal activities, generating net sales of CLP287,981 million, CLP313,017 million and CLP320,844 million, or 34.4%, 32.3%, and 29.8% of our total net sales, in the last three years, respectively.  Our sales of beer by volume in Chile increased 1.1% in 2012 primarily as a result of consumption deceleration experienced in 2012 mainly as a consequence of higher mainstream discounts in the traditional channel, growing imported brands and microbreweries.

  

The following table shows our proprietary brands, brands produced under license and brands imported under license for the Chilean market:

 

 

Cristal is our principal and best selling beer brand in Chile. Cristal Cero 0° was introduced in December 2008 and is an alcohol free beer with regular beer-like taste. Cristal Light was introduced in September 2012 to develop the light beer market in Chile and has lower alcohol content. Also in September 2012 we launched a new 1.2 liter returnable beer package to support and enhance the traditional channel and returnability.   Escudo, Chile’s second most popular beer, is targeted to young-adult consumers.  Royal Guard is our single, proprietary, super-premium brand. Royal Light is a light beer extension of the Royal Guard line and contains lower alcohol content.  Morenita is a dark beer and Dorada is a discount brand.  Lemon Stones is a lemon flavored sweetened beer, with 2.5% alcohol content.  Kunstmann is a specialty beer produced in a variety of flavors. 

 

On April 28, 2003, we, through our subsidiaries CCU Chile and CCU Argentina, and Heineken Brouwerijen B.V. signed license and technical assistance agreements which provided us with the exclusive rights to produce, sell and distribute Heineken beer in Chile and Argentina commencing June 18, 2003. On October 12, 2011, we and Heineken International B.V. signed the Amended and Restated versions of the Trademark License Agreements, which provide us with the exclusive rights to produce, sell and distribute Heineken beer in Chile and Argentina, as of January 1, 2011. These agreements have an initial term of 10 years, and shall automatically be renewed each January 1 for a new period of ten years, unless either party gives notice of its decision not to renew, in which case the agreements will be in force until the last renewal period expires Heineken beer is the leading brand in the super-premium segment, the beer segment with the highest growth in Chile in recent years.

 

 

Additionally, we produce, bottle and distribute Paulaner beer under license from Paulaner Brauerei AG, which is controlled by the BrauHolding International GmbH Group, a joint venture between Heineken and the Schörghuber Group. The current Import and License agreement, executed in 1995, which supersedes all prior agreements, provides us with the exclusive right to produce in Chile super-premium beer under the Paulaner label and distribute in Chile a variety of additional imported Paulaner products. It has a five year term, beginning in May 1995, automatically renewable for successive five-year periods unless otherwise notified by any party.  According to Paulaner’s global strategy of producing only Paulaner beer in Germany, the Licence agreement will end in June 2013. We are currently in the evaluation process to import it. The Schörghuber Group was, until April 2003, one of the two beneficial shareholders of IRSA, our major shareholder.

 

In October 1996, we and Anheuser-Busch entered into an agreement granting us the exclusive right to distribute Budweiser beer in Chile.  During 2004, we and Anheuser-Busch entered into a new distribution agreement, with a 12-year term, ending December 2015.  See “Item 3: Key Information – Risk Factors.”

 

In October 2001, we signed a license agreement with Cervecería Austral S.A. for the production of the Austral brand by our beer division.  This agreement has a fourteen-year term, automatically renewable for a seven-year term if certain conditions are fulfilled.  This agreement can be extended for an additional seven-year period if both parties express such intention in writing.

 

In May 2002, we acquired a 50% ownership interest in Compañía Cervecera Kunstmann S.A., a microbrewery located in the southern city of Valdivia, with an annual production capacity of 3 million liters at that time.  Since June 2003, our beer division began selling Kunstmann nationwide.  In November 2006, we acquired additional shares of Kunstmann that allowed us to consolidate this subsidiary. Dolbek was introduced in February 2010 as part of the Kunstmann brewery portfolio.

 

Our investment in Cervecería Austral S.A., the production of the Austral brand by our beer division, the investment in Compañía Cervecera Kunstmann S.A., plus the production of Heineken beer since June 2003, are part of our strategy to increase our presence in the premium segment of the Chilean beer market.

 

Our beer products sold in Chile are bottled or packaged in returnable and non-returnable bottles, aluminum cans or stainless steel kegs at our production facilities in the Chilean cities of Santiago and Temuco, and in Antofagasta until July 2009.  During the last three years we sold our beer products in Chile in the following containers:

 

 

Since July 2009 our beer production was centralized in the Santiago and Temuco plants.  The Temuco plant commenced production in November 1999, replacing the closed Concepción and Osorno plants. For a more detailed discussion of our capital expenditure program, see “Capital Expenditures.”

 

 

Raw Materials and other Supplies. The main raw materials used in our production of beer are malt, rice, water and hops.  We obtain our supply of malt from local producers and from Argentina. We have long-term contracts with suppliers for malt supply.  Rice is sourced from local and international suppliers in spot transactions.  We pre-treat rice in order to ensure that it meets our standards of quality.  We import hops mainly pursuant to contracts with international suppliers in the United States, which permit us to secure supplies for periods of up to four years.

 

Water is essential in the production of beer.  We obtain all of our water from wells located at our plants and/or from public utilities.  The water is treated at facilities located at our plants to remove impurities and to adjust the characteristics of the water before it is used in the production process.

 

We maintain testing facilities at each of our plants and factories where raw materials are tested.  Additionally, samples of beer are analyzed at various stages of production to ensure product quality.  Samples of Heineken and Cristal beer are periodically sent to Holland to verify the quality of the product.

 

We generally purchase all of the glass bottles used in our beer packaging from the main local glass supplier in Chile, Cristalerías Chile S.A., under three-year agreements.  During 2012, all of our requirements for aluminum cans were purchased from a global supplier, Rexam Chile S.A., but if price and delivery conditions are favorable, cans can be imported. During 2012, Rexam increased its cans capacity in Chile by 25%. Our kegs used for draft beer are purchased from various suppliers outside Chile.  We obtain the labels for our beer products mainly from local suppliers. Plastic caps are mainly purchased from two suppliers in Chile. Crowns are currently imported from Brazil and Mexico.

 

Prices of main raw materials used in beer production in Chile are tied to the U.S. dollar, and have fluctuated in Chilean peso terms due to general commodity price fluctuations in international markets as well as to the variation of the Chilean peso against the U.S. dollar.

 

We believe that all of the contracts or other agreements between us and third-party suppliers, with respect to the supply of raw materials for beer products, contain standard and customary commercial terms and conditions.  We do not believe we are dependent on any one supplier for a significant portion of our raw materials. During the past ten years, we have not experienced any material shortage or difficulties in obtaining adequate supplies of necessary raw materials, nor do we expect to do so in the future.

 

Sales, Transportation and Distribution.  We distribute all of our beer products in Chile directly to retail, supermarket and wholesale customers.  This system enables us to maintain a high frequency of contact with our customers, obtain more timely and accurate marketing-related information, and maintain good working relationships with our retail customers.

 

In July 2002, Comercial Patagona Ltda. began selling all of our beer products in the country’s Region XII. Comercial Patagona Ltda. is a subsidiary of Cervecera Austral S.A. and is responsible for the sales and distribution of our products and those of Cervecera Austral in Chile’s extreme south.

 

In October 2005, we launched Comercial CCU, a subsidiary responsible for a single sales force dedicated to selling our beverage and sweet snack products, in order to capture synergies and focus on sales execution.  Originally, this plan was piloted in rural areas and small cities in southern Chile.  As of 2008, the territory covered by Commercial CCU S.A. has expanded to include the north of Chile from Arica to Copiapó/Vallenar, and the south, from Curicó to Coyaique except for the cities of Concepción and San Fernando.

 

After production, bottling and packaging, our beer is either stored at one of the three production facilities or transported to a network of 23 owned or leased warehouses that are located throughout Chile.  Beer products are generally shipped from the region of production to the closest warehouse, allowing us to minimize our transportation and delivery costs.  

 

As of December 31, 2012, we had more than 36,932 customers in Chile for our beer products. None of our customers accounted for more than 2% of our total beer sales by volume, with the exception of three large supermarket chains that represented in the aggregate 26.3% of our total beer sales by volume.  During 2012, the Chilean supermarket industry continued to consolidate, increasing the importance and purchasing power of a few supermarket chains. We do not maintain any long-term contractual arrangements for the sale of beer with any of our customers in Chile.

 

 

In 2012, we had a dedicated sales force of approximately 189 salespeople, responsible for sales of our beer and other products in the territories not covered by Comercial CCU or Comercial Patagona. This sales force uses a pre-sell system, like the rest of CCU’s sales platform, and covers approximately 22,410 clients, including 26 supermarket chains, which represent 880 points of sales.

 

Our customers make payment for our products either in cash at the time of delivery or in accordance with one of various credit arrangements.  Payment on credit sales for beer is generally due 28 days from the date of delivery. Credit sales accounted for 33%, 35%, and 36% of our beer sales in Chile in the last three years. Losses on credit sales of beer in Chile have not been significant.

 

Beginning in October 2001, all of the warehouses and transportation companies used to store and deliver all of our products are managed on a consolidated basis by our subsidiary Transportes CCU Ltda.

 

We distribute our beer products throughout Chile to:

·         off-premise retail: small and medium-sized retail outlets, which in turn sell beer to consumers for take-out consumption;

·         on-premise retail: retail establishments such as restaurants, hotels and bars for on-premise consumption;

·         wholesalers; and

·         supermarket chains.

 

In the last three years, the percentage mix of the above distribution channels for our beer products in Chile was as follows:

 

 

The following table sets forth our beer sales volume breakdown in Chile by category, during each of the last three years:

 

 

 

 

 

The following table sets forth the changes in the average price per liter to our customers for beer for the periods indicated:

 

 

Seasonality.   As a result of the seasonality of the beer industry, our sales and production volumes are normally at their lowest in the second and third calendar quarters and at their highest in the first and fourth calendar quarters (i.e., those months corresponding to the holidays as well as the summer vacation season in Chile).

 

The following table shows our annual sales volume of beer in Chile, excluding exports, by quarter in the last three years:

 

 

 

Geographical Markets.   Our principal beer production facility is located in Santiago. Santiago and the surrounding areas (referred to as the Metropolitan Region) account for approximately 40% of the population of Chile and accounted for approximately 36% of our beer sales by volume in 2012. We also have one additional beer production facility (Temuco) located in the southern region of the country. Until July 2009 we also operated a bottling facility in Antofagasta. Currently all of our brands are supplied and distributed from these two production facilities.

 

Competition.   Our principal competitor in the beer business is Cervecería Chile (a subsidiary of Anheuser Busch InBev), which commenced operations in Chile during the second half of 1991, resulting in a loss of market share for us.  Nevertheless, after experiencing a market share of 86% in both 1994 and 1995, we were able to recapture our lost market share, reaching 90% market share in 2004.  However, in 2005, Cervecería Chile launched a new product which negatively affected our market share, and in 2006, we had a market share of 86% which we maintained until 2008. Our market share dropped to 83% in 2010, 80% in 2011, and in 2012 reached 79%. The drop in market share was a result of two principal factors: first, we experienced inventory issues for the period that followed the February 27, 2010 earthquake, which gave imported beers and our competitors an opportunity to increase their market share, and second, we have faced more aggressive competitive price pressures, and increased competition from imports and microbreweries in the market.

 

 

Our estimated share of the Chilean beer market over the last five years is as follows:

 

 

Our competitor, Cervecería Chile, has one production facility located in Santiago and distributes its products throughout the country.  Cervecería Chile uses third-party distributors in both Region I in the north, and in the city of Castro in Region X to the south.  During the last few years, they supplemented their production by importing products from surrounding markets and from the United States. We estimate that the sales of Cervecería Chile’s brands of beer by volume accounted for approximately 13% of total beer sales in 2010, 14% in 2011 and 14% in 2012.

 

Despite the high cost of shipping beer to Chile and the competitive advantage inherent to domestic producers as a result of Chile’s returnable glass bottle system, imported beer is becoming a more significant component of the Chilean beer market, in particular in the one-way packaging segment, in part supported by a stronger Chilean currency and the low cost of freight.  We estimate that imports and microbreweries accounted for 6.5% and 0.7%, respectively, of total beer sales by volume during 2012.

 

Although there are currently no significant legal or regulatory barriers to entering the Chilean beer market, substantial investment would be required to establish or acquire production and distribution facilities and bottles for use in Chile’s proprietary returnable bottling system, and to establish a critical mass in sales volumes.  Nevertheless, if long-term economic conditions in Chile continue to be favorable, other enterprises may be encouraged to attempt to enter the Chilean beer market.  In addition, our beer brands in Chile may face increased competition from other alcoholic beverages, such as wine and spirits, as well as from non-alcoholic beverages, such as soft drinks.

 

 

 

Our Business in CCU Argentina

 

Beer Business in Argentina

 

Overview.   In December 1994, we established CCU Argentina in order to develop a presence in the Argentine beer market.  During January and February 1995, we, through CCU Argentina, acquired a 62.7% interest in CICSA, a brewery located in the city of Salta, 1,600 kilometers northwest of Buenos Aires.  In September 1995, CCU Argentina expanded its operations by purchasing 98.8% of CSF, a brewery located 450 kilometers northwest of Buenos Aires in the city of Santa Fe.

 

In December 1995, we entered into a joint venture agreement pursuant to which Anheuser-Busch acquired a 4.4% interest in CCU Argentina.  The agreement involved two different contracts: an investment and a licensing contract.  The licensing contract was extended until 2025 and grants CCU Argentina the exclusive right to produce, package, market, sell and distribute Budweiser beer in Argentina.  In June 2008, after the last capital expansion, Anheuser-Busch reduced its interest in CCU Argentina to 4.04% and we increased our participation to 95.96%. In December 2010, our subsidiary Inversiones Invex CCU Ltda. acquired a 4.04% equity stake in CCU Argentina from Anheuser-Busch Investment, S.L.. After the acquisition, CCU, through its subsidiary Inversiones Invex CCU Ltda., became the sole equity holder of CCU Argentina.

 

In March 2004, AmBev and Interbrew announced an agreement to merge, creating the world’s largest brewer, InBev.  This merger was closed in August 2004. In January 2007, AmBev assumed control of Quilmes, our competitor. Inbev and Anheuser Busch merged in November 2008, creating the world’s global beer leader. See “Item 3: Risk Factors.”

 

In January 1998, we merged two of our subsidiaries, CICSA and CSF.  Currently both plants operate under the CICSA name.  As a result of the merger of CICSA and CSF, CCU Argentina holds a 99.7% interest in CICSA.

 

In April 1998, CCU Argentina paid approximately US$8 million to acquire the brands and assets of Cervecería Córdoba.  After the resolution of certain labor issues, we began the production of the Córdoba brand at our Santa Fe plant during the middle of 1998.

 

In April and June 2008, CICSA paid an aggregate amount of US$88 million to acquire ICSA.  Among other assets, ICSA owns the Bieckert, Palermo and Imperial beer brands, and a brewery in Luján, Buenos Aires, which has a nominal production capacity of 270 million liters per year. Pursuant to the acquisition of ICSA in April 2008, it was merged with CICSA in July 2008.

 

In 2011, we started to export Schneider beer to Paraguay which represented 4.4% of the total beer volume sales of CCU Argentina.

 

In 2012, the Company began the migration process to its new proprietary returnable bottle in place of the generic container currently in the industry. The decision of this important project was based primarily on the change introduced by the main market player, who in 2011 started to replace the use of generic packaging by a proprietary container for one liter returnable products. The proprietary container’s use implies important changes in logistics processes, including the adaptation of the building structure of plants, the acquisition of specific equipment, the adaptation of production lines and agreements with bottle’s suppliers and crates in order to achieve the timely supply of inputs required. This transition process requires significant investments between 2012 and 2017 mainly in packaging, equipment and infrastructure. To financing these investments, bank loans were obtained in local currency with long repayment periods, eliminating the risk of exchange rate and interest rate fluctuations thereby minimizing the fluctuation risk.

 

In December 2012, an agreement was signed between CCU, Heineken and Bebidas Del Paraguay to distribute Heineken brands in Paraguay.

 

The Argentine Beer Market.   The Argentine beer market is estimated by us to be almost three times the size of Chile’s.  Traditionally, beer and wine have been the principal alcoholic beverages consumed in the country. We estimate that annual beer consumption in Argentina was 1,809 million liters or approximately 44 liters per capita in 2012.

 

 

The table below sets forth our estimates of beer consumption in Argentina during each of the last five years:

 

We estimate that total beer consumption in Argentina increased at a four-year compounded annual growth rate of 1.1% between 2008 and 2012.  During 2012, the Argentine beer market decreased 0.5%.

 

Since January 2006, the Argentine Government has adopted different methods to directly and indirectly regulate price increases of various consumer goods, including bottled beer, in an effort to slow inflation.  Wholesale price increases are negotiated between the producer and the purchaser as a result of competitive situations in the industry and require government approval for each beer company.  Prices to consumers are determined by the negotiated wholesale price, as impacted by the producer's product pricing strategy.  In order to optimize its profit margins, the producer must carefully manage its product and channel mix and trade discounts.

Production and Marketing in Argentina.  Our operation in Argentina generated net sales of CLP 250,996 million and CLP220,903 million representing 23.3% and 22.8% of our total net sales in 2011 and 2012, respectively.  The increases during this period were the result of higher prices and volumes.

 

We produce and market super-premium, premium, medium-priced and popular-priced beer brands in Argentina.  The following table shows our principal brands produced and imported under license in Argentina:

 

 

Schneider is our principal proprietary brand in Argentina, accounting for 21.2% of our Argentine sales volume in 2012.  We began local production of Budweiser brand beer in December 1996.  Budweiser beer represented 31.7% of our Argentine sales volume in 2012. Since February 2002, our Budweiser one-liter returnable bottle, the principal format in the market, has been priced at the same level as the leading brand in the market.  In June 2003, we began selling locally produced Heineken beer. Our Schneider brand is sold in two varieties-regular lager and dark lager; the Salta brand is sold in regular and dark varieties, and the Santa Fe and Córdoba brands are sold only as regular lager. During 1997, we began to import Guinness beer from Ireland, making Argentina the only country in South America where Guinness draught is sold.  During 2001, we began importing Corona beer from Mexico, and during 2005 and 2007, we also began importing Negra Modelo beer from Mexico and Paulaner beer from Germany. In April 2008, we bought the brands Imperial, Palermo and Bieckert along with the production facility in Luján and in October 2008, we started importing Kunstmann. In 2009, we introduced Otro Mundo and the Italian imported brand, Birra Moretti. During 2012, we exported 8.82 million liters of beer from Argentina to other countries, representing 2.1% of CCU Argentina’s beer sales volume.

 

 

Our beer products are bottled or packaged in returnable and non-returnable glass bottles, aluminum cans, or stainless steel kegs at our production facilities.  During the last three year, we sold our beer products in Argentina in the following packaging formats:

 

 

The license agreement between CCU Argentina and Anheuser-Busch, which provides CCU Argentina with the exclusive right to produce, package, market, sell and distribute Budweiser beer in Argentina, had an initial term of 20 years commencing in December 1995, which in March 2008, was extended to December 2025.  Among other things, the license agreement includes provisions for both technical and marketing assistance from Anheuser-Busch.  Under the license agreement, CCU Argentina is obligated to purchase certain raw materials from Anheuser-Busch or from suppliers approved by Anheuser-Busch.  We began distribution of our locally produced Budweiser in December 1996.  See “– Sales, Transportation and Distribution.”  In addition, the license agreement is subject to certain specified market share targets and marketing expenditures.  During the third quarter 2000, we and Anheuser-Busch signed an export agreement to supply Budweiser from Argentina to Paraguay and Chile.   In August 2003, the license agreement was modified, with regard to certain targets, to adjust it to the current economic situation of the Argentine market. At the end of 2011, the agreement to supply Budweiser from Argentina to Paraguay was ended.

 

On April 28, 2003, CCU Argentina and Heineken Brouwerijen B.V., a subsidiary of Heineken International B.V., signed license and technical assistance agreements which provide us with the exclusive rights to produce, sell and distribute Heineken beer in Argentina commencing June 18, 2003. On October 12, 2011, we and Heineken International signed the Amended and Restated versions of the Trademark License Agreements which provide us with the exclusive rights to produce, sell and distribute Heineken beer in Chile and Argentina, in force as of January 1, 2011. These agreements have an initial term of 10 years, and shall automatically be renewed each year (January 1) for a new period of ten years, unless any party gives notice of its decision not to renew, in which case the agreements will be in force until the last renewal period expires. Heineken beer is the second-largest brand in terms of volume in the super-premium segment in Argentina.

 

In October 2006, we signed a long-term contract with ICSA to brew, bottle and package beer in the former AmBev plant in Luján, near Buenos Aires, that was purchased by ICSA.  In January 2007, we began brewing our local brands in this plant, obtaining enough production capacity to ensure future growth.  In April 2008, we acquired ICSA, including the Luján plant and the brands Imperial, Bieckert and Palermo. ICSA also had a brewing contract agreement with AmBev and, under such contract CICSA brewed beer for AmBev during the peak demand season of 2008-2009.

 

In November 2011, we signed an addendum to the contract with Cerveceria Modelo S.A., including a clause which specifies the automatic renewal of the contract for a period of four years, unless either party, with 90 days’ notice, opts for non-renewal, or the importer does not meet the minimum purchase requirements.

 

 

Table of Contents

Raw Materials and other Supplies.  The main raw materials used in the production of our beer products in Argentina are malt, corn syrup, water and hops. Rice is used in the production of Budweiser beer. During 2012, we continued obtaining malt, corn syrup and rice only from local suppliers.

 

Other raw materials are obtained from local and international suppliers in spot transactions, annual contracts and/or long term agreements, as is the case of hops, a critical raw material for process of production.  All purchased raw materials are tested in order to ensure that they meet our standards of quality.

 

Water is essential in the production of beer.  Our operation in Salta obtains all of its water from wells located at its plant, and the Santa Fe operation obtains all of its water from the Paraná river. The Luján operation obtains its water from the Napa Puelche, an underground sheet of water. The water is treated at facilities located at our plants to remove impurities and adjust the characteristics of the water before it is used in the production process.

 

We maintain testing facilities at each of our plants and factories in which raw materials are analyzed according to our standards.  Additionally, samples of beer are analyzed at various stages of production to ensure product quality.  Samples of Heineken and Budweiser beer are periodically sent to Holland and to Anheuser-Busch facilities in the United States, respectively, to verify the consistency and quality of the products.

 

We generally purchase all of our glass bottles from the main national glass supplier in Argentina, Rigolleau/Cattorini, and we started to purchase from Cristalerias Rosario, a local Company subsidiary of Owens Illinois. During 2012, all of our requirements for aluminum cans were purchased from Rexam Argentina S.A. Kegs used for draft beer are purchased from various suppliers in Europe. Plastic storage and carrying crates, as well as the labels (included alufoil) for beer products and crowns, are obtained from local and international suppliers.

 

Prices of main raw materials used in beer production in Argentina have not remained stable in dollar terms. Currently, the real inflation is at an annual rate of 12%. Also, from time to time, prices of agricultural products vary depending on demand and supply factors.

 

We believe that all contracts or other agreements between us and third-party suppliers, with respect to the supply of raw materials for beer products, contain standard and customary commercial terms and conditions.  We do not believe we are dependent on any one supplier for a substantial portion of our raw materials in Argentina.  We have not experienced any significant difficulties in obtaining adequate supplies of necessary raw materials and do not expect to in the future.

 

Sales, Transportation and Distribution.  After production, bottling and packaging, our beer is either stored at the production facilities or transported to a network of six warehouses leased or owned by us.  Beer products are generally shipped to those warehouses which are located within the region in which the beer products are sold.

 

We have the capacity to reach 152,125 points of sale in Argentina with our direct and indirect sales force. More than half of our beer in Argentina is sold and distributed through third-party sales and distribution chains in the regions surrounding the cities of Santa Fé, Salta, Córdoba, Rosario and Buenos Aires.  In recent years, we reduced the number of our distributors and replaced some of them with larger ones, among which there are currently three bottlers, one in the south, another in the north and the third in the northeastern region of Argentina.  As of December 31, 2012, we had a direct sales force which sold our beer products to approximately 56,759 customers within the Salta, Santa Fé, Córdoba, Rosario, the Federal Capital and its outlying metropolitan area, in addition to 73 regional and national supermarket chains throughout the country. None of our customers individually accounted for more than 1.7% of our total beer sales by volume, with the exception of two large distributors that represented in the aggregate 19% of our total beer sales by volume.

 

Our Argentine beer customers either make payments for our products in cash at the time of delivery or through one of our various credit arrangements.  Payment on credit sales is currently due 7 days from the date of delivery to wholesalers, and an average of 60 days of delivery to supermarkets. Credit sales accounted for 74%, 56% and 76% of our beer sales in Argentina in the last three years, respectively.  Losses on credit sales of beer in Argentina have not been significant.

 

 

In Argentina, though most beer is sold to wholesalers, we also sell our products to retailers and supermarket chains. In the last three years, the percentage mix of the above distribution channels for our beer products in Argentina was as follows:

 

 

 

The following table sets forth our beer sales volume in Argentina by category during each of the last three years, including exports to other countries:

 

 

The following table sets forth the changes in the average price per liter to our customers for beer for the periods indicated:

 

 

Seasonality.   As a result of the seasonality of the beer industry, our sales and production volumes are normally at their lowest in the second and third calendar quarters and at their highest in the first and fourth quarters (i.e., those months corresponding to the summer and holiday seasons in Argentina).The following table shows the annual sales volume of beer in Argentina, including exports, during each quarter in the last three years:

 

 

 

(*) Information for 2012 does not include exports to Chile.

 

Geographical Markets.  Our beer production facilities in Argentina are located in Santa Fe, Salta and Luján.

 

 

Competition.  Since 2003, after the agreement between Quilmes and AmBev, the Argentine beer market consisted of three principal brewing groups: AmBev-Quilmes, us and SABMiller (owner of CASA Isenbeck).  The principal proprietary brands of these companies are Quilmes, Schneider and CASA Isenbeck, respectively.  In December 2006, ICSA, a new competitor, entered the Argentine beer market.  ICSA began its operations at the former AmBev brewery in Luján producing three beer brands: Palermo, Bieckert and Imperial, which had previously belonged to Quilmes.  These assets were sold by AmBev-Quilmes in response to requirements of the antitrust authorities in Argentina. In 2008, these assets were bought by CCU Argentina and subsequently merged into CICSA. In November 2010, SABMiller acquired CASA Isenbeck.    

 

 

According to the information made public by our competitors and our estimates for CASA Isenbeck, the different brewing groups had the following market shares in 2012: AmBev-Quilmes, 74%; us, 23%; and SABMiller (Warsteiner until November 2010), 3%.

 

The following table shows our market share in the Argentine market over the past five years:

 

 

Quilmes, the beer market leader in Argentina and our principal competitor, also has beer operations in Chile, Paraguay, Uruguay and Bolivia. As of December 31, 2012, Quilmes had five breweries in Argentina with an estimated total annual production capacity of 1.3 billion liters.  Quilmes’ large size enables it to benefit from economies of scale in the production and distribution of beer throughout Argentina.

 

We estimate that Quilmes’ average market share in 2012 decreased to 74% from 82% in late 1994.  At that time, Companhia Cervejaria Brahma, one of the two largest beer producers in Brazil, commenced production at its new brewery in Luján, near Buenos Aires, which at present belongs to CCU Argentina.  In addition, Warsteiner (today SABMiller), a large German brewer, commenced production at its new brewery in Zárate, also near Buenos Aires, with an annual production capacity estimated to be approximately 140 million liters.  Prior to commencing production in Argentina, Companhia Cervejaria Brahma and Warsteiner competed in the Argentine market with imported beer.  In July 1999, the merger of Companhia Cervejaria Brahma and Companhia Antarctica Paulista was announced, creating AmBev.  This merger was finally approved in March 2000, creating one of the largest beverage producers in the world.

 

In May 2002, AmBev and Quilmes announced that pursuant to an agreement between both parties, AmBev would transfer all of its beer assets in Argentina, Bolivia, Paraguay and Uruguay to Quilmes in exchange for 26.4 million new B shares of Quilmes.  Additionally, according to that announcement, AmBev would purchase from the controlling shareholders of Quilmes 230.92 million class A shares for US$346.4 million.  The agreement further stipulated that AmBev can purchase at the end of a seven-year period the remaining Quilmes shares owned by the current controlling group, the Bemberg family, with AmBev shares.  The Bemberg family had the option to sell to AmBev their remaining class A shares during a period beginning with the end of the first year and ending with the seventh year after the agreement was announced.  This option was exercised in April 2006.  This transaction was approved by the Argentine antitrust authorities on January 13, 2003, subject to the condition that AmBev and Quilmes divest themselves of certain brands and the AmBev plant in Luján, near Buenos Aires, to a company currently not present in the Argentine beer market.  On February 14, 2003, through our subsidiary CICSA, we filed a complaint before the Argentine federal courts in order to be eligible to participate in the acquisition of these assets. In February 2006, the Argentinean Supreme Court of Justice ruled against our complaint.  In December 2006, the Argentine authorities approved the sale of these assets to ICSA, a company owned by local investors.  On March 3, 2004, AmBev and Interbrew announced an agreement to merge the two companies, creating the world’s largest brewer under the name InBev.  This merger was closed in August 2004. On November 18, 2008 Anheuser Busch and Inbev merged creating the global beer leader. Consolidation in the beer industry has resulted in larger and more competitive participants, which could change the current market conditions under which we operate. See “Item 3: Key Information-Risk Factors-Consolidation in the beer industry may impact our market share.”

 

Due to the high cost of shipping beer to Argentina and the competitive advantage inherent to domestic producers as a result of Argentina’s returnable glass bottle system, we estimate that imported beer sales accounted for less than 0.5% of the total sales volume in 2012.

 

 

Our beer brands in Argentina also face competition from other alcoholic beverages, such as wine and spirits, as well as from non-alcoholic beverages, such as soft drinks.

 

Excise taxes for the beverage industry in Argentina have been subject to variations in the past.  The last modification was in 1999 and has been applicable since January 2000.  The following table shows current Argentine excise beverage taxes:

 

 

Future changes in excise taxes in Argentina could adversely affect our sales volume, market share and Operating result margins.

 

Cider and other spirits Business in Argentina

 

Overview.   On December 27, 2010, CICSA acquired equity interests in Saénz Briones S.A. and Sidra La Victoria S.A. Through this transaction, CICSA became the controlling shareholder of these companies. These companies own the assets used in the production, packaging and marketing of cider and other spirits businesses in Argentina, which are marketed through several brands, including Sidra Real and Sidra La Victoria.

 

Performance. Cider volumes were 1.8% higher in 2012 than in 2011, and we had an estimated market share of 34.9%. During 2012, we continued to work towards the target of gradually softening the seasonality of cider sales.

 

Our Non-Alcoholic Beverage Business

 

Overview.   We have produced and sold soft drinks in Chile since 1902.  In November 1994, we merged our soft drink and mineral water businesses with the one owned by BAESA in Chile (PepsiCo’s bottler at that time) creating ECCUSA for the production, bottling, distribution and marketing of soft drink and mineral water products in Chile.  Thereafter, we began producing PepsiCo brands under license (currently Pepsi, Pepsi Light, Seven Up, Seven Up Light, Mirinda, Gatorade and Lipton Ice Tea).  On November 29, 1999, we purchased 45% of ECCUSA’s shares owned by BAESA for approximately CLP54,118 million.  Since that date, we own 100% of ECCUSA’s shares.  However, we have had control of ECCUSA since January 1998 after the shareholders agreement was amended.  In January 2001, ECCUSA and Schweppes Holdings Ltd. signed an agreement to continue bottling Crush and Canada Dry brands.  See “Non-Alcoholic Beverage Production and Marketing in Chile.” Prior to November 1994, we independently produced, bottled and distributed carbonated and non-carbonated soft drinks in Chile. 

 

Our line of soft drink products included our own proprietary brands, in addition to brands produced under license from Cadbury Schweppes plc. (currently Crush, Crush Light, Canada Dry Agua Tónica, Canada Dry Agua Tónica Light, Canada Dry Ginger Ale, Canada Dry Ginger Ale Light, Canada Dry Limón Soda and Canada Dry Limón Soda Light) and from PepsiCo (currently Pepsi, Pepsi Light, 7Up, 7Up light, Mirinda, Gatorade, Lipton Ice Tea and Kem Slice).

 

Under a similar licensing arrangement with Watt’s, a local fruit company, we bottled and distributed Watt’s nectar products in Chile from 1977 until December 2006. Presently, Promarca, owned by us and Watt’s 50-50%, is the owner of the brand and we produce, bottle and distribute nectar products in bottles under Promarca’s license. In 2011 we introduced several new product offerings, including Frugo, a soft drink containing fruit juice, Watt’s Clear, a nectar with grapes and apple/raspberry flavoring, Pop  from Bilz and Pap, Kem Xtreme Girl, the first zero-calory energy soft drink developed for women, Kem by Slice, Lipton Feel Green in two flavors and powder Gatorade. We also produce, bottle and/or distribute sports drinks (Gatorade) and tea (Lipton) under a license with PepsiCo and our own brand energy drinks (Kem Extreme) as well as energy drinks under a license with PepsiCo (imported SoBe Adrenaline Rush).

 

We have been in the bottled water business since 1960, and since December 2007 this business is conducted by Aguas CCU which, since June 2009, is 50.1% owned by us and 49.9% owned directly or indirectly by Nestlé Chile S.A. Under our two proprietary brand names, Cachantun and Porvenir, we bottled and nationally distribute mineral water from our own two natural sources located within the central region of Chile. In September 2008 we added the Nestlé Pure Life brand, a purified water of the highest quality standards produced and distributed under a license with Nestlé Chile S.A.. In addition, we distribute the imported brand Perrier.

 

In December 2012, our subsidiary Aguas CCU Nestlé Chile S.A. acquired 51% of the ownership of the company Manantial S.A., which enable us to participate more actively in the Home and Office Delivery business.

 

As of 2012, CCU has adopted the application of the International Financial Reporting Standards (IFRS) No. 11 Joint Arrangements. This change in accounting policy implies that investments held in joint agreements such as Promarca S.A., in which we have a 50% ownership interest, are changed from the equity method to accounting for assets, liabilities, revenues and expenses relating to its ownership share in a joint operation. The effects of this accounting change in the consolidation scope have an impact at Operational Result level, but no effect on Net income or Equity.

 

The Chilean Non-Alcoholic Beverage Market.  Commercial soft drink production was first established in Chile by us in 1902, and mineral water production began in 1960. In July 1977 CCU signed a contract with Watt’s which enabled the Company to start the production and distribution of nectars under the same brand.

 

The soft drink market in Chile consists of both carbonated and non-carbonated beverages.  The principal types of carbonated beverages are colas and non-colas.  The principal non-carbonated beverages are fruit nectars and fruit juices, which are estimated to have accounted for approximately 20% of our total non-alcoholic beverage sales by revenues in 2012.

 

 

The table below sets forth our estimates of total and per capita consumption of non-alcoholic beverage in Chile during each of the last five years:

 

 

 

The following table sets forth our estimates as to the percentage of total carbonated soft drinks production in Chile, represented by each of the two principal categories of carbonated soft drinks during the last three years:

 

 

Since the creation of the ECCUSA joint venture in November 1994, the two principal soft drinks producer groups in Chile have been (i) the licensees of The Coca-Cola Company (“TCCC”), consisting of two companies with 14 bottling plants, Coca Cola Andina and (ii) us.  Since August 1998, private labels have had increasing participation in the industry at a relatively steady level representing 2% of the total carbonated soft drink sales in Chile in 2012.  Distribution of these brands is concentrated in the supermarket channel where they constituted a 10.5% market share in 2012.  Additionally, discount brand producers have entered the market and represented 4% of the soft drinks market in 2012.  Due to the strong presence of local producers, the high cost of transportation and the existing returnable bottle system that accounts for a large portion of soft drink sales volume, we believe that there is no significant market for imported soft drinks in Chile, which were estimated to represent less than 1% of all soft drinks sales by volume in 2012.

 

The bottled water market in Chile is comprised of both carbonated and non-carbonated mineral water, and purified water.  As with the soft drink market, approximately 94% of all mineral water in Chile is processed and marketed by two entities, us and Vital Aguas S.A., a subsidiary of the three licensees companies of TCCC in Chile.  Our mineral water products have been produced by ECCUSA since November 1994. We had an approximate market share of 25.9% in the bottled purified water market segment in 2012, according to Nielsen, after introducing Nestlé Pure Life at the end of September 2008.

 

Wholesale and retail prices of both soft drinks and water products are not regulated in Chile.  We believe that the key factors determining retailers’ prices include any national and/or local price promotions offered by manufacturers, the nature of product consumption (on-premise or take-out), the type of product packaging (returnable or non-returnable), the applicable tax structure, the desired profit margins and the geographical location of the retailer.

 

 

Our Non-alcoholic Beverage Production and Marketing in Chile.   Our non-alcoholic beverage production and marketing in Chile generated net sales of CLP223,476 million, CLP248,509 million and CLP292,133 million, or 26.7%, 25.6% and 27.2% of our total net sales, in the last three years, respectively.

 

The following table shows the soft drink and water brands produced and/or sold by us through ECCUSA during 2012:

 

 

 

In 1994, ECCUSA and Cadbury Schweppes plc (“Cadbury Schweppes”), the latter through its subsidiaries CS Beverages Ltd. and Canada Dry Corporation Ltd., entered into license agreements for all Cadbury Schweppes products. On December 11, 1998, TCCC announced an agreement with Cadbury Schweppes to acquire certain of the latter's international beverage brands, including those licensed to ECCUSA, and in August 1999 the agreement was reported to have been consummated.  In September 2000, after more than a year’s litigation, both in Chile (suits at civil courts and antitrust authorities) and England (arbitration under ICC rules), ECCUSA and TCCC reached an agreement superseding ECCUSA’s previous license contracts with CS Beverages Ltd. and Canada Dry Corporation Ltd.  The new agreement, referred to as the “Bottler   Contract,”  was executed between ECCUSA and Schweppes Holdings Ltd., concerning the Crush and Canada Dry brands, and was approved by the Chilean antitrust commission, thus putting an end to the proceeding regarding the Cadbury Schweppes brands issue and dismissing all complaints filed in consideration of the agreement. On January 15, 2009, the parties executed an amendment to the Bottler Contract which, among others, extended its duration until December 31, 2018, renewable for consecutive five-year periods provided that certain conditions are fulfilled.