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Emerging Markets: Equity

Latin America - Beverages

Via Concha y Toro, S.A.

Planting For Future Growth

VCO - US$30.5 CONCHATORO - Ps260 March 18, 1998

We are initiating coverage of Via Concha y Toro, the largest wine company in Chile, with a buy rating and a 12-month price target of $35/ADS, based on a P/E multiple of 22x. In our opinion, VCO is well positioned to strengthen its position as Chiles largest producer and exporter of wine due to its low cost structure and as it increases the percentage of premium/varietal wines offered. We are looking for EPS growth in the 20% range for the next few years driven by the companys increased penetration of the major export markets of North America, Europe and South America and as its product mix shifts more towards higher-quality products. In addition, growth will be fueled by operating efficiencies achieved as the company increases self-sufficiency of grapes and has the ability to better control the cost and quality of its grape supply. Further potential upside exists as the Argentine winery comes on line and the joint venture with Baron Philippe de Rothschild begins shipping superpremium wine products. We believe strong earnings will continue beyond 2000 as new plantations of higher-quality grapes replace third-party purchases and the mix shifts more to premium wines adding substantially to both the top and bottom lines.


52-Week Range: Shares Out.:(MM) Market Cap.:(MM) Float:(MM) ADR Ratio: L-T Debt:(MM) L-T Debt/Total Cap: Div./Yield: S&P 500: 3 Yr. Growth Rate: CY 98 P/E-to-Growth: 34-21 719.2 $438.7 323.6 50:1 $5.0 3.1% $0.47/1.5% 1080.45 20% 1.0x

FY: (Dec.) EPADS: (US$) EPS: (Pesos) EPS Growth (US$) P/E Price/EBITDA EV/EBITDA EV/Case Sales P/CF Revenue 1997A 1998E 1999E $1.31 $1.57 $1.91 11.55 14.17 17.74 23% 20% 21% 23.3x 19.4x 15.9x 14.8x 11.8x 9.8x 14.8x 11.8x 9.8x $23.47 $21.31 $19.59 16.9x 13.4x 11.1x $144.0 $176.4 $209.0

KATHLEEN HEANEY (212) 250-6805 OLGA URGILES (212) 250-7336

Listing: Santiago Stock Exchange

BT Alex. Brown Research INVESTMENT THESIS In our opinion, the Company has a well-defined growth strategy for both the domestic and export markets. Sales abroad should expand as a result of increased marketing, the joint venture with Rothschild and the shift to premium wines. In the domestic market, the Companys strategy is divided between the popular and premium/varietal segments. Nevertheless, we expect consumption of popular wines to remain the largest percentage of the Companys mix. We expect VCO to increase its market share in the popular wine segment as new presentations are introduced and as the industry consolidates. Over the medium term, as per capita income increases, we believe consumers will begin to demand a higher quality wine. Finally, over the longer term, we believe local consumption will shift towards the varietal and premium wines. By this time, VCO is expected to be adequately self-sufficient in the production of higher-quality grapes which should enable the Company to show above average revenue and earnings growth. In addition, VCO benefits from Chiles lower cost of land and labor, compared to its competitors, allowing it to maintain competitive prices and increase margins. INVESTMENT HIGHLIGHTS Concha y Toro is the largest vineyard and winery in Chile in terms of volume and revenue. The Company is also a market leader in the US market ranking as one of the top two largest importers of wines in the ready-to-drink segment. VCO produces wine for both the domestic and export markets. Currently the export/domestic wine mix is 60/40, but we expect in the future, 70% of revenue will come from exports. The keys to the Companys success, in our opinion, will be: Shift to Varietal/Premium Wines The second stage of the Companys strategy is to continue developing its export sales while at the same time growing volume in the higher margin varietal and premium segments. Pivotal to the success of this strategy is to ensure the quality of the product. VCO plans to accomplish this through tight control of the grape, both production and supply, by increasing its self-sufficiency. The new wines from Argentina and the joint venture with Rothschild will also be a major part of this strategy to move the product mix to the varietal/premium labels. Top line growth and margins should be enhanced as varietal and premium wines contribute a larger portion of the mix, all else being equal. Low Cost Producer. Due to low cost of land, low labor costs and excellent growing conditions, the Chilean wineries have some of the lowest cost structures in the world. One of the major advantages for VCO is the significantly lower cost of grapes. For example, the average cost/ton for chardonnay grapes is $700 in Chile and approximately $1,245 in the United States. A similar situation exists with the merlot grapes, priced at $75/ton in Chile and $102/ton in the United States. As a consequence, we estimate the cost of production for VCO is approximately $4.89 per case versus over $24/case for US companies. As shown in our forecasts, we expect the operating margin to expand from 17% in 1997 to 17.5% in 1999. VCO has one of the best operating margins in the industry. Well Defined Distribution Channel. VCOs large size provides certain economies of scale in distribution further contributing to its low cost structure. VCO has an excellent distribution network within Chile, comprised of warehouses, trucks and salespersons. On the export side, VCO was the

BT Alex. Brown Research first, and largest exporter of Chilean wine. This has enabled the Company to obtain exclusive agreements with top distributors throughout the world. Brand Name Recognition. VCO has invested heavily over the last few years building brand name recognition. Concha y Toro has established considerable brand equity as a high quality wine at a competitive price. At this time, we believe VCO is the only Chilean wine company with definite brand-name recognition. VCO has been exporting for over 50 years, compared with the other Chilean wine companies which began exporting only recently. Strong brand recognition exists not only in the United States and Europe but also throughout South America. The higher visibility achieved by its label has allowed VCO to command higher prices and larger volumes in the international markets. Export Market. The export market is very important for VCOs business and in our opinion, the outlook is positive. Overall consumption of alcoholic beverages is declining worldwide and for several years a transition has been underway from heavier alcoholic beverages to wines and light beers. This is particularly true in countries with aging populations, the US and Europe, for example. Chile is known for its red wines which is good news for VCO since the fastest growing segment in the US market is Merlots, increasing 45% in 1997 versus growth of less than 20% for other varietals. On the other hand, we believe there is large potential in Latin America as disposable income increases and consumers desire for higher quality wine increases. The Latin American market accounted for 24% of VCOs exports in 1997. We expect consumption in the US to increase by 3-4%, which is the largest import market in the world and accounts for the largest percentage, 36.3%, of VCOs exports. Higher revenue in the export market will be driven by the shift to varietal/premium wines. Domestic Market. We expect the domestic market for higher-margin wine will develop over the longer term as it has in other wine-consuming countries. Currently, domestic wine consumption is mostly of the lower-quality product, packaged in tetra-pak containers. These wines are priced at the lower end of the price scale and are a substitute for other low-alcoholic content beverages, particularly, beer. Ultimately, we expect a shift in the domestic market to the varietal/premium wines. Capital Expenditures Trending Downward The bulk of the Companys capital expenditures were made between 1995-1997. During that period the company spent in excess of $30 million for new vineyards and wineries. We anticipate expenditures of around US$20 million this year to support the higher quality production coming on line over the next few years. According to our estimates, internally generated funds sufficiently cover capital needs in the foreseeable future. Additional investments in other wineries, such as Argentina, or vineyards have not been factored into our forecasts. Industry consolidation The Chilean wine industry is very fragmented and is comprised of many small producers. In fact, many small companies left the market last year, as it was more profitable to sell grapes to other wineries. Due to the fragmented nature of the industry, we believe there is ample room for consolidation. Although we have not considered this is our forecasts, if VCO were to acquire another company, we estimate long term growth could be enhanced by around 20%-25%.

BT Alex. Brown Research Diversification of properties VCOs vineyards are spread throughout Chiles five main wine growing areas, whereas many Chilean vineyards are limited to just one. In this way, VCO has diversified the agricultural risk from climatic conditions (flood, drought and frost). On the positive side, unlike many other regions worldwide El Nio has not had a negative impact on VCOs vineyards to date. VCOs efforts to diversify vineyards has also resulted in the discovery of new and unique growing areas such as the Casablanca Valley. Phylloxera-Free Vineyards This is both good news/bad news for the Company. Chile is a phylloxera-free region. Phylloxera is a pest that attacks the roots of the vines. No pesticide currently exists to eradicate this disease, and infected vines must be destroyed. Chilean vines were introduced in the 1850s, at about the time that French vines were being devastated by this pest. Since that time, California, New Zealand, Australia and South Africa have all been affected. California vineyards have recently completed an estimated $1 billion replanting. NYSE listing provides visibility and liquidity. The wine business in general, has tended to be a family-owned and run business and not many companies worldwide are listed on major stock exchanges. VCO, however, is one of the exceptions. Late in 1994, the Company listed its shares on the NYSE after trading on the Santiago Exchange for over 50 years. Approximately 45% of the shares are freely trade with the remaining 55% in the hands of the controlling shareholders and directors. CONCERNS There is some, but not much pricing flexibility. Due to competitive conditions in the home market prices have moved in line with local inflation. As mentioned previously, wine growers are a highly fragmented group. Approximately 40% of the wine for domestic consumption is grown by small, unknown producers. For this reason, a volatile pricing situation exists for the grapes grown for domestic consumption. As a consequence, revenue per liter derived from popular wines is significantly lower than from export wines. Margins are also inferior, due to the highly competitive environment. Finally, inexpensive wine sold domestically is a substitute for beer. Climatic conditions can be both friend or foe. If a bad harvest or natural disaster, such as a drought, occurs, it will affect the Companys production by lowering yields per hectare. Offsetting this to some extent is the location of VCOs vineyards which are spread thought the five main wine producing regions. Recovery of California Producers. California wineries have announced a record harvest for 1997 and are expecting excellent quality wines which could have a negative impact on volume since the US is a very important market for the Company. The Company relies on third-parties for 80% of its grape requirements. For additional grapes required for wine production, the Company relies on about 200 independent growers and other wine producers in Chile, mostly for the production of its popular wines. To reduce its dependency on third-parties, VCO has been increasing its own grape production. Currently, the Company purchases 80% of its grape requirements from third parties. However, if we exclude grapes for popular wine, in which the Company purchases 100% of its requirements, the figure slips to 60%. Looking ahead, the sooner and greater self-sufficiency that VCO achieves on grape production the sooner the Company should be able to improve its cost structure and ensure the quality of its wine. 4

BT Alex. Brown Research

The natural advantages of Chile for the growing of grapes is attracting the attention of European and US winemakers. Chile is free from disease and benefits from a stable climate. Phylloxera hit California a few years back and more recently El Nio has had a negative impact on the weather in California, and Europe. Chile, however, has been spared from the disease, and bad weather. Another advantage is melting snow from the Andes Mountains that can provide plenty of water for irrigation in the countrys dry climate. As a result, the country has attracted many foreign wine companies, particularly those that experienced shortages due to disease and bad weather. POTENTIAL UPSIDE New Market - Argentina. In 1996, the Company made its first move outside the home market by establishing Via Patagonia in Argentina. Late in 1997 Via Patagonia began producing and distributing through the VCO network Argentine wine mainly in the export markets. The Argentine products will complement the Chilean product line. The success of the Argentine business will enable VCO to participate more fully in the Mercosur markets, a market that is increasing in importance to the Company. We believe there is large growth potential in Argentina and the business is well placed to repeat Chiles success in the export wine market as the quality of wine from the Country improves. Currently, due to the low quality of the wine, there is not a large export business despite the fact that Argentina is the worlds fourth largest wine producing country. Moreover, over half the grapevines in South America are planted in Argentina. Additionally, according to Wine Spectator, Chile and Argentina combined produce more than 10% of the worlds wine. We expect case sales in 1998 of approximately 200,000 with potential upside to the 400,000 range now that capacity has been increased. We estimate the contribution to revenue in 1998 will be approximately US$4 million. Strategic Joint Venture. In January 1997, VCO and Baron Philippe de Rothschild S.A. (Rothschild) developed a joint venture based in Chile to produce super premium wines mainly for export. Additionally, reciprocal distribution/support agreements were signed involving France, Asia and the Latin American markets. VCO will contribute 40 hectares of the Puente Alto prime vineyards, while Rothschild will provide technical supervision. As a result, the Company will gain greater access to Asian and French markets, while enabling Rothschild to take advantage of VCOs distribution networks within Latin America VALUATION AND STOCK PERFORMANCE We are initiating coverage of VCO with a buy rating. We estimate net income in 1998 and 1999 will increase by 20% and 21% respectively in 1998. Given the above average expected growth rate for the Company, we believe VCO should be valued at a slight premium to other Chilean wine companies. As shown in the following table, the VCO shares have typically sold at a significant premium to the market multiples.

BT Alex. Brown Research

Table 1: VCO Historical Valuation Measures versus the IGPA

1993 Price/Earnings IGPA VCO Price/Book Value IGPA VCO 1994 1995 1996 1997

20.0x 35.2x

21.4x 32.9x

17.1x 33.7x

14.6x 22.1x

16.0x 19.2x

2.1x 4.1x

2.5x 1.3x

2.1x 1.9x

1.1x 2.3x

2.0x 2.3x

Source: Company Reports and IFC Data Book

As shown in the following tables we have chosen to look at VCO with various valuation parameters. On a P/E basis the shares are trading below the historical level, (see Figure 1.) although we believe the outlook for the Company has never been better with earnings poised to grow 20% per year, on average, for the next three years. Selling at 15.9x estimated 1999 estimated earnings the shares are selling at a discount to the growth rate. We believe a fair multiple for the Company is 22x - 25x estimated earnings. Figure 1.
C oncha y T oro P/E
60 50 40 30 20 10 0

1/1/91 3/12/92 Source: D atastream






We believe, the VCO shares are attractively valued, based on strong fundamentals and on other valuation measures such as Price/Sales, Revenue/Case and FV/EBITDA when compared to other Chilean and U.S. wineries that are experiencing slower growth. (See Table 3.)

BT Alex. Brown Research

Table 2: Historical and Forecast Valuation Parameters

1994 Price/Earnings Price/Cash Flow Price/Book Value Price/Sales Price/EBITDA EV/EBITDA 32.9x 18.6x 1.3x 2.6x 16.3x 17.1x 1995 33.7x 16.9x 1.9x 2.9x 19.5x 19.9x 1996 22.1x 15.4x 2.3x 3.0x 15.0x 15.2x 1997 19.2x 14.0x 2.3x 2.5x 12.3x 12.4x 1998E 19.4x 13.4x 2.4x 2.5x 11.8x 11.8x 1999E 16.0x 11.1x 2.2 2.1x 9.8x 9.8x

Source: Company Reports and BT Alex. Brown Incorporated Research Estimates

Table 3: Wine Comps - 1998 Valuation Parameters

Earnings Growth Price/Earnings Price/Sales Price/Cash Flow Price/EBITDA CASE ANALYSIS Volume Growth Avg Rev/Case EBITDA/Case MktCap/Case Sales Revenue (MM) VCO 19.8% 19.4x 2.5x 13.4x 11.8x MOND 8.6% 18.5x 1.8x 5.7x 7.9x BERW 17.4% 27.7x 2.5x 7.1x 10.5x

8.8% $17.00 $1.80 $22 $176

5.3% $48.23 $11.18 $137 $327

10.4% $52.83 $12.86 $90 $316

Source: Company Reports and BT Alex. Brown Incorporated Research Estimates

STOCK PERFORMANCE The VCO shares are traded on the main markets in Chile, both the Santiago and Electronic Stock Exchanges. In addition, in late 1994 the Company placed shares in the international markets. There are a total of 719 million shares outstanding with an estimated free float of 45%. Approximately 50% of the shares are controlled by management and directors. Although the VCO shares are still fairly illiquid, average trading volume in New York is 10,751. We expect trading volume to increase as more investors become familiar with the company.

BT Alex. Brown Research Figure 2.

C o n c h a y T o ro
U S$
40 35 30 25 20 15 10 1 0 /1 4 /9 4
S o u r c e : D a ta s tr e a m

8 /2 3 /9 5

7 /1 /9 6

5 /8 /9 7

3 /1 7 /9 8

Figure 3.

C o n ch a y T oro v s. IP S A
C hP
In d e x = 1 0 0
220 200 180 160 140 120 100 80 60 1 /1 /9 6 5 /1 4 /9 6 S o u r c e : D a ta s tr e a m C o n c h a y T o ro IP S A

9 /2 5 /9 6

2 /6 /9 7

6 /2 0 /9 7

1 1 /3 /9 7

3 /1 7 /9 8

OUTLOOK Both Chile, the home market, and Argentina are expected to show strong economic growth in the coming years. According to BT Alex. Brown Incorporateds economists, the region as a whole is set to report the highest growth in over a decade. We expect most of VCOs growth to come from a shift to varietal/premium wines, increased shipments in the export market and to a lesser extent pricing. In fact, as part of our assumptions, we expect prices to increase according to US dollar inflation, or approximately 2%. Sales abroad should expand as a result of increased marketing activity by VCO and the Chilean wine industry. The three major Chilean wineries sell at all price points, low-high so we do not anticipate any negative association between VCO and cheap wine. The advantage VCO has over Chilean competitors is its size, distribution network, and global diversification. VCO continues to invest in improving technology. Due to pricing inflexibility and increasing wages, this is one area where the Company can look to reduce costs. By investing in machinery to increase productivity Concha y Toro can maintain its low-cost producer status. We do not foresee additional gains in yields per hectare since they are already some of the highest in the world. In addition, as the company focuses on

BT Alex. Brown Research increasing premium/varietal wines in the mix, yields per hectare will decrease, revenue, however will increase. Finally, increased marketing will be crucial for the Company. We estimate VCO spends approximately 5% of revenue on marketing, but that in the future this could increase to 7%. The best way to increase revenue is by building brand loyalty. According to management, the Company has spent heavily over the past few years building brand awareness in the export markets. Our unscientific poll of 50 friends, relatives and colleagues revealed that those that did know Chilean wines, Conch y Toro was the name given most frequently to our questions. However, most did not purchase a Chilean wine by name, but by price or recommendation by the liquor store owner. Thus, we believe the Company still has a way to go, particularly in the US to build brand loyalty, brand awareness appears to be there. At the end of 1998 we expect to see the first shipments of the jointly developed superpremium wine from the Rothschild joint venture. Initially, we are looking for volume of 3,000 cases, but priced approximately 3 times higher than VCOs top of the line Don Melchor. The contribution to revenue in 1999 is estimated at US$200,000. Ultimately, we expect to see peak volume of 30,000 cases. While not huge, the relationship with Rothschild should enhance the reputation of VCOs wines in the export market. Total volume growth should exceed 8%, with most of the growth driven by the export business. Pricing in the domestic market could exceed US-dollar inflation as average prices are lower and historical currency devaluation has not kept up with domestic inflation. Most growth should come as VCOs product mix shifts more toward the export market, where margins are better. Export wines command a higher price than domestic wines. The other revenue item, which includes Via Patagonia, the Argentine winery, should grow at a much faster pace. With average revenue/case of $20 (approximately $2 above that of the Chilean wine) and estimated volume of 200,000 cases, this business can add approximately US$3.8 million to revenue in each of the next two years. In the short term, cost of goods sold as a percentage of revenue, will increase slightly from 1997 due to the higher cost of grapes. Over the longer term, however, cost of goods sold should decline as VCOs own grape supply comes on-line, providing stability in grape supply. Also, we have taken into consideration industry-wide grape capacity that is also coming on line. Lower grape prices in Chile affect VCO positively since they are dependent on third-party purchases. Consequently, gross margins should expand from 17% in 1997 to 17.5% in 1999. Longer term, marketing costs, however, are expected to increase as the Company steps up its marketing budget domestically and internationally. Nevertheless, increases in SG&A should be below revenue growth. Interest expense should remain stable as we are not expecting any increase in the level of debt. For 1998 and 1999 we are expecting less of a peso devaluation, thus the price level re-statement should be lower. We are using a tax rate slightly above the Companys historical level, but slightly below the Chilean statutory rate of 15%. As a result of all the above, we are looking for net income growth in the 20% range over the next two years. All of our forecasts are shown in the table on the following page.

BT Alex. Brown Research Figure 4.


C o n c h a y T o r o - O p e r a tin g I n c o m e
(U S $ M illio n s)

$40 $ 3 0 .1 $30 $ 2 4 .5 $ 1 8 .5 $20 $ 1 0 .0 $10

$ 3 6 .6

$ 9 .0

$ 9 .6

$0 1993 1994 1995 1996 1997E 1998E S o u rc e : C o m p a n y R e p o rts a n d B T A le x . B ro w n In c o r p o ra te d R e s e a rc h E s tim a te s



Via Concha y Toro Income Statement - US $

1992 V o lu m e T o ta l (T h s d L te rs ) D o m e s tic E x p o rts (M illio n s o f U S $ E x c e p t fo r E P S ) REV ENUE D o m e s tic E x p o rt O th e r TOTAL REVENUE C o s t o f S a le s G R O S S P R O F IT S e llin g & A d m in . E x p . O P E R A T IN G IN C O M E N o n -O p e ra tin g R e s u lts : In te re s t & O th e r F in a n c ia l In c . In te re s t & F in a n c in g E x p e n se s R e a d ju s tm e n t G a in s E x c h a n g e D iffe re n c e L o s s (G a in ) In v . in R e la te d C o s .L o s s (G a in ) G o o d w ill A m o rtiz a tio n O th e r N o n -O p e ra tin g E x p .,N e t P ric e L e v e l R e s ta te m e n t T o ta l N o n -O p e ra tin g R e s u lts P R E -T A X IN C O M E In c o m e T a x M in o rity In te re s t N E T IN C O M E E B IT D A E a rn in g s p e r S h a re E a rn in g s p e r A D S (5 0 :1 ) W g h t.A v g . S h a re s O /S (M M s )

1993 5 3 ,4 9 9 3 4 ,2 7 0 1 9 ,2 2 9

1994 5 6 ,7 0 5 3 3 ,4 7 0 2 3 ,2 3 5

1995 6 8 ,3 2 0 3 7 ,2 4 4 3 1 ,0 7 6

1996 7 4 ,7 7 9 3 7 ,9 6 4 3 6 ,8 1 5

1997 8 3 ,4 7 8 4 1 ,5 0 0 4 1 ,9 7 8

% Chg 1 1 .6 % 9 .3 % 1 4 .0 %

1998E 9 0 ,8 0 5 4 4 ,0 0 1 4 6 ,8 0 4

% Chg 8 .8 % 6 .0 % 1 1 .5 %

1999E 9 9 ,8 1 2 4 5 ,7 7 2 5 4 ,0 4 0

% C hg 9 .9 % 4 .0 % 1 5 .5 %

5 3 ,4 1 2 3 2 ,8 2 8 2 0 ,5 8 4

$ 3 3 .9 3 0 .1 6 .5 7 0 .5 4 2 .3 2 8 .2 1 3 .7 1 4 .5

$ 3 3 .3 3 0 .4 5 .5 6 9 .2 4 4 .4 2 4 .9 1 4 .9 1 0 .0

$ 3 5 .0 3 4 .8 7 .5 7 7 .3 5 0 .5 2 6 .8 1 7 .8 9 .0

$ 3 9 .0 4 1 .5 9 .6 9 0 .2 6 0 .0 3 0 .2 2 0 .6 9 .6

$ 4 2 .1 6 1 .3 1 0 .7 1 1 4 .1 7 0 .2 4 3 .9 2 5 .5 1 8 .5

$ 5 2 .7 7 9 .4 1 1 .9 1 4 4 .0 9 1 .5 5 2 .5 2 8 .0 2 4 .5

2 5 .1 % 2 9 .6 % 1 1 .2 % 2 6 .2 % 3 0 .4 % 1 9 .5 % 9 .9 % 3 2 .7 %

$ 6 1 .2 9 5 .4 1 9 .8 1 7 6 .4 1 1 3 .5 6 2 .8 3 2 .7 3 0 .1

1 6 .2 % 2 0 .1 % 6 5 .9 % 2 2 .5 % 2 4 .1 % 1 9 .7 % 1 6 .9 % 2 2 .9 %

$ 6 8 .3 1 1 3 .7 2 7 .0 2 0 9 .0 1 3 3 .7 7 5 .3 3 8 .7 3 6 .6

1 1 .6 % 1 9 .2 % 3 6 .4 % 1 8 .5 % 1 7 .8 % 1 9 .8 % 1 8 .2 % 2 1 .5 %

(0 .4 ) 1 .4 (0 .0 ) (0 .6 ) 1 .4 1 .9 1 2 .6 1 .6 0 .0 $ 1 1 .0 1 4 .5 $ 0 .0 2 $ 1 .0 0 5 4 7 .3 4 0 .0 % 2 0 .6 % 6 0 .0 % 1 9 .4 %

(0 .3 ) 2 .2 0 .8 (0 .1 ) 0 .5 3 .0 6 .9 0 .5 0 .0 $ 6 .5 1 0 .0 $ 0 .0 1 $ 0 .5 8 5 5 7 .9 3 5 .9 % 1 4 .4 % 6 4 .1 % 2 1 .5 %

(0 .6 ) 1 .2 1 .0 0 .5 0 .4 0 .5 2 .9 6 .1 0 .1 0 .0 $ 6 .0 9 .0 $ 0 .0 1 $ 0 .5 0 5 9 7 .2 3 4 .7 % 1 1 .6 % 6 5 .3 % 2 3 .1 %

(1 .8 ) 0 .1 (1 .4 ) (0 .4 ) (0 .0 ) 0 .0 0 .3 4 .3 1 .2 8 .4 0 .7 0 .0 $ 7 .7 9 .6 $ 0 .0 1 $ 0 .5 3 7 1 8 .5 3 3 .5 % 1 0 .6 % 6 6 .5 % 2 2 .8 %

(1 .6 ) 0 .1 (0 .9 ) (0 .5 ) (0 .0 ) 0 .0 0 .8 3 .1 0 .9 1 7 .5 2 .2 0 .0 $ 1 5 .3 1 8 .5 $ 0 .0 2 $ 1 .0 7 7 1 9 .2 3 8 .5 % 1 6 .2 % 6 1 .5 % 2 2 .3 %

(0 .8 ) 0 .1 0 .9 2 .3 2 .6 2 1 .9 3 .0 0 .0 $ 1 8 .9 2 4 .5 $ 0 .0 3 $ 1 .3 1 7 1 9 .2 3 6 .5 % 1 7 .0 % 6 3 .5 % 1 9 .4 % 2 3 .4 % 3 2 .7 % 2 3 .4 % 2 4 .8 %

(0 .2 ) 0 .1 (0 .2 ) (0 .0 ) (0 .0 ) 0 .0 1 .2 3 .0 3 .9 2 6 .2 3 .5 0 .0 $ 2 2 .6 3 0 .1 $ 0 .0 3 $ 1 .5 7 7 1 9 .2 3 5 .6 % 1 7 .1 % 6 4 .4 % 1 8 .5 % 1 9 .8 % 2 2 .9 % 1 9 .8 % 1 9 .8 %

(0 .3 ) 0 .2 (0 .2 ) (0 .0 ) (0 .0 ) 0 .0 1 .5 3 .6 4 .9 3 1 .8 4 .3 0 .0 $ 2 7 .4 3 6 .6 $ 0 .0 4 $ 1 .9 1 7 1 9 .2 3 6 .0 % 1 7 .5 % 6 4 .0 % 1 8 .5 % 2 1 .2 % 2 1 .5 % 2 1 .1 %


BT Alex. Brown Research

2 1 .2 %

G ro ss M a rg in O p e ra tin g M a rg in COGS SG& A

S o u r c e : C o m p a n y R e p o r ts & B T A le x .B r o w n In c o rp o ra te d R e se a r c h E s tim a te s

BT Alex. Brown Research COMPANY DESCRIPTION Via Concha y Toro (VCO), founded over 115 years ago by Don Melchor de Concha y Toro and Don Ramon Subercaseaux. Concha y Toro is a vertically integrated company that owns and operates vineyards that grow grapes for its own wine production, owns vinification plants which convert grapes into wine; as well as bottling plants and the most extensive wine-only distribution network in Chile. Today VCO is Chiles largest producer and exporter of wines. In 1997, the Company sold 84.8 million liters of wine and reported revenue of $144 million and net income of $19 million. The vines used by the company were the traditional varieties that came from, Bordeaux, France. These include Cabernet Sauvignon, Merlot, Sauvignon Blanc and Semillon. Via Concha y Toro, also has a licensing agreement with Bodegas y Viedos Santa Emiliana S.A., a Chilean corporation that was spun off from the Company in 1986, to bottle and sell Santa Emiliana and Cosecha wines in the domestic market. In addition, VCO bottles, for a fee, wine produced and sold by Santa Emiliana in export and domestic markets under Santa Emilianas labels. VCO and Santa Emiliana have some directors and officers in common as well as a significant percentage of common share ownership. Finally, VCO has a 49% stake in Hiram Walker Chile S.A., a joint venture with Hiram Walker S.A. of Argentina. In the home market, the most important product for the Company is popular wines which represented approximately 74% of revenue in 1997. In second place is varietal wines which accounts for about 13% of revenue. As shown in the following table, there is a growing demand in the home market for the higher quality wines VCO meets the demand for popular wine through third-party suppliers. As previously mentioned, wine consumption in Chile has remained flat for the past few years. However, revenue has not been adversely affected, as higher quality wines have continued to capture a larger portion of the revenue mix, increasing 22% in 1997 on 14.3% volume growth. In the near term, growth for VCO will be coming from the export market, but in our opinion, the home market over the longer term offers some attractive possibilities.

Table 4:

Domestic Revenue Mix

Popular Varietal Varietal Blend Premium Sparkling Bulk 1993 71.0% 15.3% NA 6.1% 3.4% 4.2% 1994 73.6%. 15.8% NA 8.0% 2.3% 0.3% 1995 71.7% 14.2% 3.5% 8.2% 1.7% 0.7% 1996 72.2% 13.1% 1.8% 9.5% 2.1% 1.3% 1997 73.7% 13.4% 0.9% 9.4% 2.5% 1.0%

Source: Company Reports and BT Alex. Brown Incorporated Research Estimates

Overview of Operations
Products Wines are generally classified into two groups, sparkling and table wines. Sparking wines are those that have gone through a second fermentation to reach the bubbly stage. Most of the wine produced in Chile is classified as table, which is a wine with an average liquor content of 9-15%. The current system divides these wines by amount, type or types of grape, region and age. A wine must contain at least 75% of certain grape variety in order for it to be specified on the label.


BT Alex. Brown Research The company sells its wines under the following brand names: Premium Don Melchor Marques de Casa Concha Casillero del Diablo Trio Late Harvest Cono Sur Varietal & Varietal Blend Popular Concha y Toro Tocornal *Tocornal Clos de Pirque *Cono Sur Fressco *Maipo San Jose *Sunrise (*Sold in Export Markets only)

Figure 5.

C on ch a y T oro
D o m e s tic V o lu m e - (M illio n L ite rs)

50 4 4 .0 3 9 .5 40 3 2 .8 30 3 7 .2 3 4 .3 3 3 .5 4 1 .5 3 8 .0

4 5 .8



0 1991 1992 1993 1994 1995 1996 1997 1998E S o u r c e : C o m p a n y R e p o rts a n d B T A le x . B ro w n In c o r p o r a te d R e s e a r c h E s tim a te s


Casillero del Diablo, launched in 1965, was the companys first step towards the production of more complex wines. The wine was made from selected grapes and ages two years longer than the standard Cabernet Sauvignon, that was being produced back then. Today, Casillero del Diablo is VCOs best selling premium wines. Trio, a premium wine successfully introduced in 1996 and launched in three markets, Chile, the United States, and the U.K is now sold in five markets. Originally, the company planned to ship about 30,000 cases, however because of the wines wide acceptance over 70,000 cases were shipped selling out within three months. In the domestic market VCOs bottled wines are sold in five segments, which similarly to the export division includes premium, varietal, varietal blend and sparkling wines, as well as popular wines. The Companys popular wines are packaged primarily in one liter Tetra Brik packages. Premium and varietal wines are gaining popularity in both the domestic and foreign markets and after gaining brand recognition outside the local market, the Company is now focusing in increasing sales of both wines in all markets. However, in the domestic market VCO will also continue to promote popular wine, which has been the best seller in terms of volume. In the foreign markets VCO will concentrate on fast growing markets, such as the United States, the Untied Kingdom and Asia. We believe there is plenty of room for the Company to expand the product line in both the domestic and export markets. Variety of production means either planting new varieties in existing regions or developing new areas within existing regions. Recently


BT Alex. Brown Research the Company introduced Sunrise varietal for both export and the domestic market. In Argentina, the Company is currently producing Trivento, a line of varietal and premium wines, of which the varietal wines are already available worldwide. Bulk Wine The company also sells wine in bulk form, in both the domestic and export markets, which represents a small portion of total revenue (approximately 1%). Usually, bulk wine is sold in the domestic market to reduce excess inventories. However, due to strong demand, the Company was able to bottle and sell more wine thus lessening sales of bulk wine. Market conditions will determine whether the Company needs to sell wine in bulk. Vineyards/facilities VCO has thirteen vineyards in Chile that are located in five of the Countrys six principal wine growing valleys. Twelve of these vineyards are company owned while the other is leased. The original Concha y Toro estate is located at the Pirque vineyard, about 45 minutes south of the main city of Santiago. In 1996, the Company added a fourteenth vineyard located in Mendoza, Argentina and in 1997 VCO added the 15th, also in Argentina. This translates to over 5,000 company owned hectares in Chile, 135 leased hectares, and 304 hectares owned in Argentina. Of the aggregate amount about 3,349 hectares are suitable for planting vineyards. The average age of VCOs vines classified as producing, is 12 years. A vine is in its prime from ages 12-40, so the quality of VCOs wine is just now reaching prime.

T o ta l O w n e d H e c ta re s T o ta l A ra b le N o t Y e t P ro d u c in g @ 1 0 0 % P ro d u c in g @ 1 0 0 % F a llo w
S o u r c e : C o m p a n y R e p o rts

1997 5 9 5 1 .2 3 3 4 5 .9 9 0 5 .5 1 9 0 6 .6 5 3 3 .8

4 8 1 7 .8 2 7 3 7 .3 1 0 9 7 .6 1 3 5 8 .2 2 8 1 .4

The Company relies on third-parties for 80% of its grape requirements. For additional grapes required for wine production, the Company relies on about 200 independent growers and other wine producers in Chile, mostly for the production of its popular wines. Many of these producers have been selling to VCO for many years so long-term relationships have been established. In the past, one-year contracts were the norm, but more recently VCO has been signing longer term contracts with its key suppliers to ensure a steady supply of high-quality grapes. The Companys cost structure is also enhanced from this new arrangement as the price of grapes is determined ahead of time rather than on a spot market. Currently, the Company purchases 80% of its grape requirements from third parties. However, if we exclude grapes for popular wine, in which the Company purchases 100% of its requirements, the figure slips to 60%. In 1996, one third of the grapes purchased for popular wines came from independent 14

BT Alex. Brown Research growers, while the remaining two thirds was purchased in bulk from other wine producers. As mentioned previously, grapes for popular wines are a commodity, as a result it makes no sense for VCO to use grapes from its own vineyards for this product. The Company will continue to plant grapes in line with volume growth so that it maintains at least 40% self-sufficiency. Looking ahead, the sooner and greater selfsufficiency that VCO achieves on grape production the sooner the Company can improve its cost structure and ensure the quality of its wine. Throughout the last six years the Company has substantially expanded the cultivation of grapes on its Chilean vineyards, increasing from 1,207 hectares in 1992 to 2,812 hectares in 1997. This enabled VCO to decrease dependency from outside parties and to better control the cost and quality of its grape supply. By comparison, the well known Robert Mondavi vineyards meets approximately 10% of its grape requirements. VCO has two bottling plants in Chile which are located in Pirque and Lontue. Pirque, the Companys principal bottling plant, is located outside Santiago and is used for the bottling of Premium, varietal, varietal blend and sparkling wines. This plant, with capacity of 7.6 million liters per month, is equipped with the latest bottling and labeling equipment and includes three bottling lines. These bottling lines fill five different presentations, which include the popular 1 liter, and 750 ml bottles. In addition, this facility has a wine cellar that stores up to 2.5 million bottles for aging, as well as a warehouse with the space to store 178,000 cases (1.6 million liters) of finished wines. The Lontue plant is located about 124 miles from Santiago and is used for the bottling of the five liter glass jugs, and for the liter and half liter Tetra Brik packages. The Tetra Pak machines have a capacity of 6.6 million liters per month. The company leases five plants for the vinification of popular wine from purchased grapes. Distribution All domestic wines are distributed through Comercial Peumo, a wholly-owned subsidiary, which is Chiles largest wine distribution company with 85-90% market penetration. This distribution company consists of 14 warehouse and 15 regional offices that service approximately 14,000 customers throughout the entire country. In the United States, the Company distributes wine through Banfi. EXPORT MARKETS For the last fifteen years or so, per capita consumption of wine in Chile has been declining primarily as a result of increasing beer consumption, particularly among the younger consumers, but more recently has leveled off at approximately 18 liters. As a result many Chilean wine producers, including VCO, were forced to look outside the home market for growth. In the last five years, exports of Chilean wine have increased at a compounded rate of 25% per year, reaching 216.3 million liters in 1997. Today, Via Concha y Toro leads the market with approximately 20% of all Chilean wine exports in volume terms, with the closest competitor, Via San Pedro, accounting for about 9% of the market.


BT Alex. Brown Research Figure 6.


C on ch a y T oro
V o lu m e T re n d s - (M illio n L ite rs )

D o m e s tic

E x p o rt
9 0 .8 8 3 .5 7 4 .8

9 9 .8

80 6 8 .3 5 7 .4 60 5 3 .4 5 3 .5 5 6 .7



0 1991 1992 1993 1994 1995 1996 1997 1998E S o u r c e : C o m p a n y R e p o r ts a n d B T A le x . B r o w n In c o r p o r a te d R e s e a r c h E s tim a te s


In foreign markets, VCOs bottled wines are sold in four segments: premium, varietal, varietal blend and sparkling wine. Exports sales as a percentage of VCOs total revenue in the last five years have increased from 42.7% in 1992 to 53.7% in 1996, and reached 55.2% of revenue in 1997. As a percentage of volume, export sales represent 50% of total wine sales and could reach 53% by the end of this year. VCO has a well developed and diversified export base. Chilean wines continue to gain recognition as quality improves. In 1997, the principal markets were the United States (36.3% of total exports), South America (14%), Canada (5.3%) and Europe, mostly the U.K. (24.6%). Exports to Asia were 9.4% of the total, with over 80% going to Japan. The U.S. is the largest export market for VCO, with most of its sales concentrated on the east and southeast coasts. VCO is the leading Chilean wine exporter to the United States, growing from US$2.0 million in 1989 to US$29.4 million in 1997, making it the Companys most important export market. In 1997, the United States represented about 36.3% of export revenue. The Company is the second largest wine exporter to the U.S., competing with low-to-mid priced category such as Gallo and Sebastiani. The wines VCO sells for the export market are varietal, blended varietal, premium and sparkling wines. These are all packaged in glass bottles and produced from the proprietary grape harvest. Figure 7.

C o n c h a y T o r o E x p o r t S a le s b y R e g io n
(U S $ M M )

U .S .

S o u th A m e ric a


E u rop e
0 1993 S o u r c e : C o m p a n y R e p o r ts





BT Alex. Brown Research

On the export front, the Companys major Chilean competitors are Via Santa Rita, Via San Pedro and Santa Carolina. Most of the industry is focusing on the $8.00-$10.00 per 750ml bottle, particularly the smaller wineries since they ship very limited volume. Competition for the Chilean wines comes mostly from California wineries, and to a much lesser extent French wine. Both regions, Chile and California, produce wines in large quantities. Among the California wineries, we believe Mondavi, Glenn Ellen, Sebastiani and Sutter Home would be the most comparable. Californian wines offer the most competition for the Chilean wines, since the US market is the domestic market for California wines. In general, California wines are sold at a much higher price than Chilean and French. We attribute this to the fact that California wines are attaining quality status similar to French wines and more recently due to bad harvests which curtailed production. According to our unscientific poll of fifty friends, relatives and colleagues, the average off-premise US consumer finds Chilean wines comparable to California wines. However, most purchases were made because the buyer believed he/she was getting a good wine at a good price. Quality control is imperative in this segment which is why the Company is aggressively pursuing self-sufficiency in premium wines. CHILEAN WINE INDUSTRY Domestic wine sales can be characterized by the sale of popular wines which are packaged in low-cost tetra pak containers. Popular wines are produced from lowerquality grapes or purchased from third parties. In general, these wines are sold at the lowest price point and consumed by lower income segments of the Chilean population. Due to their low price point, they are often substituted for beer. In addition, elasticity of demand is closely tied to price among consumers. Grapes grown for popular wine are treated as a commodity with the following characteristics: lower quality, marginal return on investment, abundant supply and volatile pricing. As a consequence, in our opinion, it makes no sense for a grower to enter this business, particularly since the industry is moving towards a higher-quality product. As we see it, the advantage for VCO is the marketing and distribution of this product. Wine, at times is almost a perfect substitute for beer, and any changes in the price can affect sales. In order to gain domestic market share the company has maintained price competitiveness with other wine producers as well as with the beer market. As a result the Company introduced new wines targeted at different consumer segments, and increased marketing and advertising. The Companys main competitors in the domestic market are two other wineries and indirectly brewers. As mentioned previously, the majority of wine sold in the domestic market is in tetra pak with Via Santa Rita and Via San Pedro (majority owned by Compania Cerveceria Unidas, S.A.) the two major competitors. Santa Carolina is another significant, but declining player in the industry. Together VCO, Santa Rita and San Pedro command approximately 60% of the market. The large wine companies tend to have larger market shares outside the main city of Santiago, because their large size allows for better distribution of the product. The annual growing season in Chile is from October through March/April with the harvest taking place in March and April. For popular wines the period from harvest, 17

BT Alex. Brown Research fermentation, bottling and aged is approximately 3 weeks. The period for a premium wine, however, can be up to three years. Last year the crop was lighter than expected due to the drought. Nevertheless, the quality of the grape was better since small size grapes allows for a more concentrated juice, a higher sugar content and a generally better taste and higher quality end product. The wines produced from the 1997 harvest are expected to be of higher quality, further enhancing the reputation of the Chilean wineries. FINANCIAL BACKGROUND AND LATEST RESULTS Revenue. Over the past few years, exports have been contributing a greater portion of the Companys revenue while the domestic market share of revenue has declined from 61% in 1990 to 37% at year end 1997. Other revenue, consists mostly of bottling services. Also included are some mineral water, liquor, fruit export sales and more recently Via Patagonia. The level of sales has remained constant between 8-10% of revenue. Revenue growth for VCO since the beginning of the decade has been quite impressive, increasing from $54 million in 1991 to $144 million for 1997. (See figure 8.). Figure 8.
R ev en u e $250

C o n c h a y T o ro
R e v e n u e & N e t I n c o m e ($ U S M M ) N et In com e $40 $35 $30 $25 $20 $15 $10 $5 $0
1993 1994 1995 R evenu e S o u rc e : C o m p a n y R e p o rts 1996 N e t In c o m e 1997 1998R 1999E

$176 $27 $144 $114 $15 $19 $23


$69 $77 $7 $6

$90 $8



With respect to its balance sheet, management has maintained a conservative policy. Before the 1994 equity offering, the company had long-term debt of approximately $32 million, or 37% of total capitalization. VCO used the proceeds from the offering to lower debt to the $9 million level and over the years has been reduced even further. The Company would consider increasing the level of debt if internally generated funds were inadequate for capital expenditures, but according to our calculations the Company has ample cash to fund investments for the next several years. FOURTH QUARTER AND FULL YEAR 1997 HIGHLIGHTS Via Concha y Toro posted strong 1997 results, as earnings per ADS advanced 20% to $1.31/ADS, compared to a year ago, fueled by strong revenue growth of 22% on 12% volume growth. Revenue growth is attributed to strong growth in bottled wine volume coupled with higher prices in both export and domestic markets. VCO continues to build sales of varietal and premium wines thanks to the success of Trio and Sunrise. As a rsult, during 1997, export revenue jumped 26.1% to US$80


BT Alex. Brown Research million, which resulted from a 24% increase in bottled wine volume coupled with higher average prices of 14%, compared to a year ago. More specifically, exports volume increased in all of VCOs export regions, with the exception of Canada. Nevertheless, while bottled wines shipped to Canada slipped 3.3%, revenue advanced (US$ terms) 8.6%. The United States and Europe, the Companys most important markets, remained strong throughout the year, growing 19% and 27% in volume terms, respectively, and 35% and 37% in revenue (US$) terms. Additionally, exports to Asia continued to grow dramatically, climbing 220% in volume (and revenue) terms. Japan and Taiwan accounted for about 80% and 11%, respectively, of the Companys total exports to that region. However, while Japan has become the third largest market for the Company, Asia, as a whole, continues to represent a very small portion of the Companys total sales equivalent to less than 1% of volume. Surprisingly, while the Chilean wine industry experienced price increases and lower volume in the domestic market, VCOs domestic sales were strong during the year. Volume advanced 9% over 1996, compared to a 2% growth in 1996, despite higher average prices. Consequently, revenue jumped 22% to ChP$23,127 million (US$53 million). Each of the premium, varietal and popular wines averaged a 22% increase in revenue, which was due to price increases that took place in March and June 1997. A shortage of grapes, coupled with stronger demand, particularly in the fourth quarter, pushed the price of grapes up by about 25%, which penalized the gross margin causing a decline of two percentage points to 36.5%, compared to the preious year. However, SG&A expenses significantly improved reaching 19.4% of revenue versus 22.3% a year ago. As a consequence operating income surged ahead 29% to ChP$10,764 million (US$24.5 million) and the operating margin improved, reaching 17% versus 16.2% a year earlier. CAPITAL EXPENDITURES The bulk of VCOs capital investment occurred in the early part of the decade. Since 1991, VCO has invested about US$72 million in agriculture, infrastructure and other wine business. Throughout the last five years the Company has reduced dependency from outside parties and has been able to better control the cost and quality of its grape supply. As a result the Company substantially expanded the cultivation of grapes on its vineyards, which has increased from 1,207 hectares in 1992 to 2,812 hectares in 1997. Today all of the Companys properties are equipped with state-of-the-art technology and processing facilities to ease the production and a high quality product. Also during 1996, VCO invested US$23 million in the acquisition of additional properties in Chile and one Argentina. For the two year period 1997 and 1998, the company has budgeted about US$42 million for capital investments to support expected growth in future sales. VCO will focus on the production and bottling of all wines, emphasizing premium and varietal wines that continue to gain popularity in both the domestic and foreign markets. More specifically, the Company plans to invest in the acquisition of 400 hectares of wine growing property in Chile; the planting of wine vines and development of the corresponding infrastructure needed in certain company properties, including Argentina; to increase vinification and storage capacity; and for the development of the joint venture with Rothschild, which will produce super premium wines.


BT Alex. Brown Research DIVIDEND POLICY By law, Chilean companies have to pay out 30% of net income in the form of dividends so long as retained earnings exist or tax loss carryforwards do not. Historically management has maintained a payout ratio of at least 30%, which translates into quarterly dividend payments of ChP 1.10/share. Looking ahead, we believe the Company has ample room to maintain, if not increase the payout ratio, based on our expectations for strong growth and low capital investment requirements. Additional Information Available Upon Request

Although information herein has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Opinions and estimates may be changed or withdrawn without notice. This report is not intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale of any security, loan or other instrument. We or our affiliates or persons associated with us or such affiliates ("Associated Persons") may: maintain a long or short position in securities, loans or other instruments referred to herein or in other securities, loans or instruments of issuers named herein, or in related derivatives; purchase or sell, make a market in, or engage in other transactions involving such securities, loans or instruments of such issuers; and/or provide investment banking, credit, or other services to any issuer named herein. The past performance of securities, loans or other instruments does not guarantee or predict future performance. This report may not be reproduced or circulated without our written authority and must not be distributed to private customers in the U.K. Bankers Trust International ("BTI") or its Associated Persons may act upon or use material in this report prior to publication. Transaction strategies described in this document are merely concepts of investment strategies that might be pursued given a particular view of one or more markets. The strategies described in this document may not be appropriate for all investors. This report has been prepared by BT Alex. Brown Incorporated and distributed in the jurisdictions listed below by the Bankers Trust affiliates named below. This report has been distributed in all other jurisdictions by Bankers Trust International PLC, regulated by SFA and approved by BTI. BT Alex. Brown Incorporated accepts responsibility for this report in the United States, and persons in the United States wishing to effect any transactions should contact BT Alex. Brown Incorporated. Copyright 1998 Bankers Trust New York Corporation. All rights reserved. United States of America BT Alex. Brown Incorporated One Bankers Trust Plaza New York, NY 10006 (212) 250-2500 United States of America BT Alex. Brown Incorporated 1 South Street Baltimore, MD 21202 (410) 727-1700 United Kingdom Bankers Trust International PLC (Regulated by SFA) 1 Appold Street London EC2A 2HE, England 44171-982-2500 Brazil IBT Banco de Investimento S.A. Al Santos 1.940 3 Andar 0148200 Sao Paulo, SP, Brazil 55-11-282-0577 Mexico Bankers Trust Company Bosque de Alisos 45-A 3rd Floor Col. Bosques de las Lomas 11700 Mexico, D.F 525-257-6600 Japan BT Asia Securities Limited 1-3-1 Marunouchi Chiyoda-Ku, Tokyo, 100 Japan 813-3286-0721

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Denis J. Callaghan, Director of Equity Research (410) 895-3210 BASIC INDUSTRIES

Harriet C. Baldwin, CFA Industrial Manufacturing..............................(212) 237-2357 Kenneth A. Blaschke -- Automotive Parts. ................................................(415) 477-3206 Jordan Estra -- Metals. .............................................................................(212) 250-4695 H. Lloyd Kanev Specialized Processing & Manufacturing.....................(212) 250-1294 Stephen S. Kim Building. .......................................................................(212) 237-2029 Daniel D. Khoshaba -- Packaging.............................................................(212) 250-8107 Michael J. Kostolansky Agricultural Chemicals. ...................................(212) 237-2041 David Manlowe Specialty Chemicals. ....................................................(212) 237-2182 D. Cotton Swindell Industrial & Environmental Services. ......................(410) 895-3337 Sergey A. Vasnetsov Commodity Chemicals. .........................................(212) 237-2058 Mark Wilde -- Forest Products, Paper, Packaging. ..................................(212) 250-8896

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Mark C. Alpert, CFA -- Specialty Financial Services ..............................(212) 237-2017 George A. Bicher, III Banks ..................................................................(212) 237-2218 Kevin Comer REITs ...............................................................................(212) 250-5941 Alice Cornish, CPCU -- Property-Casualty Insurance, Group Health. .....(617) 261-3708 John A. Hall -- Insurance, Asset Management ..........................................(410) 895-3343 Samuel T. Hillers, CFA -- REITs..............................................................(410) 895-3368 Evelyn Leon-Infurna -- REITs. .................................................................(212) 250-6325 Don J. Kauth -- Banks...............................................................................(212) 237-2239 Gerald E. Lewinsohn -- Property-Casualty Insurance. .............................(212) 250-8476 Joseph K. Morford III -- Banks................................................................(415) 732-3003

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Rev. 3/2/98

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