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Via Concha y Toro, S.A.Planting For Future Growth

Buy

VCO - US$30.5

CONCHATORO - Ps260

March 18, 1998

Chile

I N I T I A L R E P O R T

We are initiating coverage of Via Concha y Toro, the largest winecompany 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 wellpositioned to strengthen its position as Chiles largest producer andexporter of wine due to its low cost structure and as it increases thepercentage of premium/varietal wines offered.

We are looking for EPS growth in the 20% range for the next fewyears driven by the companys increased penetration of the major export

markets of North America, Europe and South America and as its productmix shifts more towards higher-quality products.

In addition, growth will be fueled by operating efficiencies achieved asthe company increases self-sufficiency of grapes and has the ability tobetter control the cost and quality of its grape supply.

Further potential upside exists as the Argentine winery comes on line andthe joint venture with Baron Philippe de Rothschild begins shipping super-premium wine products.

We believe strong earnings will continue beyond 2000 as new plantationsof higher-quality grapes replace third-party purchases and the mix shiftsmore to premium wines adding substantially to both the top and bottomlines.

KATHLEEN HEANEY(212) [email protected]

OLGA URGILES(212) [email protected]

MARKET DATA FINANCIAL DATA52-Week Range: 34-21 FY: (Dec.) 1997A 1998E 1999EShares Out.:(MM) 719.2 EPADS: (US$) $1.31 $1.57 $1.91Market Cap.:(MM) $438.7 EPS: (Pesos) 11.55 14.17 17.74

Float:(MM) 323.6 EPS Growth (US$) 23% 20% 21%ADR Ratio: 50:1 P/E 23.3x 19.4x 15.9xL-T Debt:(MM) $5.0 Price/EBITDA 14.8x 11.8x 9.8xL-T Debt/Total Cap: 3.1% EV/EBITDA 14.8x 11.8x 9.8xDiv./Yield: $0.47/1.5% EV/Case Sales $23.47 $21.31 $19.59S&P 500: 1080.45 P/CF 16.9x 13.4x 11.1x3 Yr. Growth Rate: 20% Revenue $144.0 $176.4 $209.0CY 98 P/E-to-Growth: 1.0x

Listing: Santiago Stock Exchange

Emerging Markets: Equity

Latin America - Beverages

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BT Alex. Brown Research

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INVESTMENT THESIS

In our opinion, the Company has a well-defined growth strategy for both the domesticand 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 winesegment as new presentations are introduced and as the industry consolidates. Over themedium term, as per capita income increases, we believe consumers will begin todemand a higher quality wine. Finally, over the longer term, we believe localconsumption will shift towards the varietal and premium wines. By this time, VCO isexpected to be adequately self-sufficient in the production of higher-quality grapes whichshould 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 itscompetitors, 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 andrevenue. The Company is also a market leader in the US market ranking as one of thetop two largest importers of wines in the ready-to-drink segment. VCO produces winefor both the domestic and export markets. Currently the export/domestic wine mix is60/40, but we expect in the future, 70% of revenue will come from exports. The keys tothe Companys success, in our opinion, will be:

Shift to Varietal/Premium WinesThe second stage of the Companys strategy is to continue developing its export saleswhile at the same time growing volume in the higher margin varietal and premiumsegments. 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 andsupply, by increasing its self-sufficiency. The new wines from Argentina and the jointventure with Rothschild will also be a major part of this strategy to move the productmix to the varietal/premium labels. Top line growth and margins should be enhanced asvarietal 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 Chileanwineries have some of the lowest cost structures in the world. One of the majoradvantages for VCO is the significantly lower cost of grapes. For example, the averagecost/ton for chardonnay grapes is $700 in Chile and approximately $1,245 in the UnitedStates. 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 forVCO is approximately $4.89 per case versus over $24/case for US companies. As shownin 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 contributingto 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

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first, and largest exporter of Chilean wine. This has enabled the Company to obtainexclusive 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 acompetitive 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, comparedwith the other Chilean wine companies which began exporting only recently. Strongbrand recognition exists not only in the United States and Europe but also throughoutSouth America. The higher visibility achieved by its label has allowed VCO tocommand 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 outlookis positive. Overall consumption of alcoholic beverages is declining worldwide and forseveral years a transition has been underway from heavier alcoholic beverages to winesand light beers. This is particularly true in countries with aging populations, the US andEurope, 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 1997versus growth of less than 20% for other varietals. On the other hand, we believe thereis large potential in Latin America as disposable income increases and consumers desirefor higher quality wine increases. The Latin American market accounted for 24% ofVCOs exports in 1997. We expect consumption in the US to increase by 3-4%, which isthe largest import market in the world and accounts for the largest percentage, 36.3%, ofVCOs exports. Higher revenue in the export market will be driven by the shift tovarietal/premium wines.

Domestic Market.We expect the domestic market for higher-margin wine will develop over the longer termas 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 arepriced at the lower end of the price scale and are a substitute for other low-alcoholiccontent beverages, particularly, beer. Ultimately, we expect a shift in the domesticmarket to the varietal/premium wines.

Capital ExpendituresTrending DownwardThe bulk of the Companys capital expenditures were made between 1995-1997. Duringthat 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 higherquality 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 consolidationThe 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 sellgrapes to other wineries. Due to the fragmented nature of the industry, we believe thereis 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 beenhanced by around 20%-25%.

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Diversification of propertiesVCOs vineyards are spread throughout Chiles five main wine growing areas, whereasmany Chilean vineyards are limited to just one. In this way, VCO has diversified theagricultural risk from climatic conditions (flood, drought and frost). On the positiveside, unlike many other regions worldwide El Nio has not had a negative impact onVCOs vineyards to date. VCOs efforts to diversify vineyards has also resulted in thediscovery of new and unique growing areas such as the Casablanca Valley.

Phylloxera-Free VineyardsThis 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 toeradicate this disease, and infected vines must be destroyed. Chilean vines wereintroduced in the 1850s, at about the time that French vines were being devastated bythis pest. Since that time, California, New Zealand, Australia and South Africa have allbeen affected. California vineyards have recently completed an estimated $1 billionreplanting.

NYSE listing provides visibility and liquidity. The wine business in general, hastended 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 forover 50 years. Approximately 45% of the shares are freely trade with the remaining 55%in the hands of the controlling shareholders and directors.

CONCERNSThere is some, but not much pricing flexibility. Due to competitive conditions in thehome market prices have moved in line with local inflation. As mentioned previously,wine growers are a highly fragmented group. Approximately 40% of the wine fordomestic consumption is grown by small, unknown producers. For this reason, a volatilepricing situation exists for the grapes grown for domestic consumption. As aconsequence, 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 perhectare. Offsetting this to some extent is the location of VCOs vineyards which arespread thought the five main wine producing regions.

Recovery of California Producers. California wineries have announced a recordharvest for 1997 and are expecting excellent quality wines which could have a negativeimpact 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. Foradditional grapes required for wine production, the Company relies on about 200independent growers and other wine producers in Chile, mostly for the production of itspopular wines. To reduce its dependency on third-parties, VCO has been increasing itsown grape production. Currently, the Company purchases 80% of its grape requirementsfrom third parties. However, if we exclude grapes for popular wine, in which theCompany purchases 100% of its requirements, the figure slips to 60%. Looking ahead,the sooner and greater self-sufficiency that VCO achieves on grape production thesooner the Company should be able to improve its cost structure and ensure the qualityof its wine.

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The natural advantages of Chile for the growing of grapes is attracting theattention of European and US winemakers. Chile is free from disease and benefitsfrom a stable climate. Phylloxera hit California a few years back and more recently ElNio 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 ismelting 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 winecompanies, 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 homemarket by establishing Via Patagonia in Argentina. Late in 1997 Via Patagonia beganproducing and distributing through the VCO network Argentine wine mainly in theexport markets. The Argentine products will complement the Chilean product line. Thesuccess of the Argentine business will enable VCO to participate more fully in theMercosur 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 torepeat Chiles success in the export wine market as the quality of wine from the Countryimproves. Currently, due to the low quality of the wine, there is not a large exportbusiness despite the fact that Argentina is the worlds fourth largest wine producingcountry. Moreover, over half the grapevines in South America are planted in Argentina.Additionally, according to Wine Spectator, Chile and Argentina combined produce morethan 10% of the worlds wine.

We expect case sales in 1998 of approximately 200,000 with potential upside to the400,000 range now that capacity has been increased. We estimate the contribution torevenue 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 winesmainly for export. Additionally, reciprocal distribution/support agreements were signedinvolving France, Asia and the Latin American markets. VCO will contribute 40hectares of the Puente Alto prime vineyards, while Rothschild will provide technicalsupervision. As a result, the Company will gain greater access to Asian and Frenchmarkets, while enabling Rothschild to take advantage of VCOs distribution networkswithin 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 averageexpected growth rate for the Company, we believe VCO should be valued at a slightpremium to other Chilean wine companies. As shown in the following table, the VCOshares have typically sold at a significant premium to the market multiples.

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Table 1: VCO Historical Valuation Measures versus the IGPA

1993 1994 1995 1996 1997

Price/EarningsIGPA 20.0x 21.4x 17.1x 14.6x 16.0xVCO 35.2x 32.9x 33.7x 22.1x 19.2x

Price/Book ValueIGPA 2.1x 2.5x 2.1x 1.1x 2.0xVCO 4.1x 1.3x 1.9x 2.3x 2.3x

Source: Company Reports and IFC Data Book

As shown in the following tables we have chosen to look at VCO with various valuationparameters. On a P/E basis the shares are trading below the historical level, (see Figure1.) although we believe the outlook for the Company has never been better with earningspoised to grow 20% per year, on average, for the next three years. Selling at 15.9xestimated 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. Con cha y Toro P/E

Source: D atastream1/ 1/ 91 3/ 12/ 92 5/ 25/ 93 8/ 5/ 94 10/ 18/ 95 12/ 30/ 96 3/ 12/ 980

10

20

30

40

50

60

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

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Table 2: Historical and Forecast Valuation Parameters

1994 1995 1996 1997 1998E 1999E

Price/Earnings 32.9x 33.7x 22.1x 19.2x 19.4x 16.0xPrice/Cash Flow 18.6x 16.9x 15.4x 14.0x 13.4x 11.1xPrice/Book Value 1.3x 1.9x 2.3x 2.3x 2.4x 2.2Price/Sales 2.6x 2.9x 3.0x 2.5x 2.5x 2.1x

Price/EBITDA 16.3x 19.5x 15.0x 12.3x 11.8x 9.8xEV/EBITDA 17.1x 19.9x 15.2x 12.4x 11.8x 9.8x

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

Table 3: Wine Comps - 1998 Valuation Parameters

VCO MOND BERW

Earnings Growth 19.8% 8.6% 17.4%Price/Earnings 19.4x 18.5x 27.7xPrice/Sales 2.5x 1.8x 2.5xPrice/Cash Flow 13.4x 5.7x 7.1xPrice/EBITDA 11.8x 7.9x 10.5x

CASE ANALYSISVolume Growth 8.8% 5.3% 10.4%Avg Rev/Case $17.00 $48.23 $52.83EBITDA/Case $1.80 $11.18 $12.86MktCap/Case Sales $22 $137 $90Revenue (MM) $176 $327 $316


STOCK PERFORMANCE

The VCO shares are traded on the main markets in Chile, both the Santiago andElectronic 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 anestimated free float of 45%. Approximately 50% of the shares are controlled bymanagement and directors. Although the VCO shares are still fairly illiquid, averagetrading volume in New York is 10,751. We expect trading volume to increase as moreinvestors become familiar with the company.

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Figure 2. C o n c h a y T o roU S $

Source: Da tas t ream

1 0 /1 4 /9 4 8 /2 3 /9 5 7 /1 /9 6 5 /8 /9 7 3 /1 7 /9 81 0

1 5

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Figure 3. C o n c h a y T o r o v s . I P S AC h P

Source: Da tas t ream

1 /1 /9 6 5 /1 4 /9 6 9 /25 /9 6 2 /6 /97 6 /2 0 /9 7 1 1 /3 /9 7 3 /1 7 /9 86 0

8 0

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I n d e x = 1 0 0

C o n c ha y T o ro IP S A

OUTLOOKBoth Chile, the home market, and Argentina are expected to show strong economicgrowth 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 ofour assumptions, we expect prices to increase according to US dollar inflation, orapproximately 2%. Sales abroad should expand as a result of increased marketingactivity by VCO and the Chilean wine industry. The three major Chilean wineries sell atall price points, low-high so we do not anticipate any negative association between VCOand 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 andincreasing wages, this is one area where the Company can look to reduce costs. Byinvesting in machinery to increase productivity Concha y Toro can maintain its low-costproducer status. We do not foresee additional gains in yields per hectare since they arealready some of the highest in the world. In addition, as the company focuses on

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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 spendsapproximately 5% of revenue on marketing, but that in the future this could increase to7%. The best way to increase revenue is by building brand loyalty. According tomanagement, the Company has spent heavily over the past few years building brand

awareness in the export markets. Our unscientific poll of 50 friends, relatives andcolleagues revealed that those that did know Chilean wines, Conch y Toro was the namegiven most frequently to our questions. However, most did not purchase a Chilean wineby name, but by price or recommendation by the liquor store owner. Thus, we believethe Company still has a way to go, particularly in the US to build brand loyalty, brandawareness appears to be there.

At the end of 1998 we expect to see the first shipments of the jointly developed super-premium wine from the Rothschild joint venture. Initially, we are looking for volume of3,000 cases, but priced approximately 3 times higher than VCOs top of the line DonMelchor. 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 exportbusiness. Pricing in the domestic market could exceed US-dollar inflation as averageprices are lower and historical currency devaluation has not kept up with domesticinflation. Most growth should come as VCOs product mix shifts more toward theexport market, where margins are better. Export wines command a higher price thandomestic wines. The other revenue item, which includes Via Patagonia, theArgentine 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 200,000cases, this business can add approximately US$3.8 million to revenue in each of the nexttwo years.

In the short term, cost of goods sold as a percentage of revenue, will increase slightlyfrom 1997 due to the higher cost of grapes. Over the longer term, however, cost ofgoods sold should decline as VCOs own grape supply comes on-line, providing stabilityin grape supply. Also, we have taken into consideration industry-wide grape capacitythat is also coming on line. Lower grape prices in Chile affect VCO positively since theyare dependent on third-party purchases. Consequently, gross margins should expandfrom 17% in 1997 to 17.5% in 1999. Longer term, marketing costs, however, areexpected to increase as the Company steps up its marketing budget domestically andinternationally. 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 ofdebt. 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 Companyshistorical level, but slightly below the Chilean statutory rate of 15%. As a result of allthe above, we are looking for net income growth in the 20% range over the next twoyears. All of our forecasts are shown in the table on the following page.

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Figure 4. C o n c h a y T o r o - O p e r a t in g I n c o m e(US$ M i l lions )

Source: Com pany Reports and BT Alex . Brown Incorporated Research Est imates19 9 3 1 99 4 1 99 5 199 6 19 9 7 E 19 9 8 E 19 9 9 E

$ 0

$ 1 0

$ 2 0

$ 3 0

$ 4 0

$ 5 0

$10 .0$9 .0 $9 .6

$18 .5

$24 .5

$30 .1

$36 .6

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COMPANY DESCRIPTION

Via Concha y Toro (VCO), founded over 115 years ago by Don Melchor de Concha yToro and Don Ramon Subercaseaux. Concha y Toro is a vertically integrated companythat owns and operates vineyards that grow grapes for its own wine production, ownsvinification plants which convert grapes into wine; as well as bottling plants and themost 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 wineand reported revenue of $144 million and net income of $19 million. The vines used bythe company were the traditional varieties that came from, Bordeaux, France. Theseinclude Cabernet Sauvignon, Merlot, Sauvignon Blanc and Semillon.

Via Concha y Toro, also has a licensing agreement with Bodegas y Viedos SantaEmiliana S.A., a Chilean corporation that was spun off from the Company in 1986, tobottle 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 anddomestic markets under Santa Emilianas labels. VCO and Santa Emiliana have somedirectors and officers in common as well as a significant percentage of common shareownership. 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 whichrepresented approximately 74% of revenue in 1997. In second place is varietal wineswhich accounts for about 13% of revenue. As shown in the following table, there is agrowing demand in the home market for the higher quality wines VCO meets thedemand for popular wine through third-party suppliers. As previously mentioned, wineconsumption in Chile has remained flat for the past few years. However, revenue has notbeen adversely affected, as higher quality wines have continued to capture a largerportion of the revenue mix, increasing 22% in 1997 on 14.3% volume growth. In thenear 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

1993 1994 1995 1996 1997

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


Overview of Operations

ProductsWines are generally classified into two groups, sparkling and table wines. Sparkingwines are those that have gone through a second fermentation to reach the bubblystage. Most of the wine produced in Chile is classified as table, which is a wine withan 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 grapevariety in order for it to be specified on the label.

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The company sells its wines under the following brand names:

Premium Varietal & Varietal Blend PopularDon Melchor Concha y Toro TocornalMarques de Casa Concha *Tocornal Clos de PirqueCasillero del Diablo *Cono Sur FresscoTrio *Maipo San Jose

Late Harvest *Sunrise (*Sold in Export Markets only)Cono Sur

Figure 5. C o n c h a y T o r oDom es t ic Vo lume - (M i l lion L i t e rs )

Source: Com pany Repor ts and BT A lex . Brown I ncorpora ted Research Es t ima tes19 9 1 19 9 2 1 9 93 1 99 4 1 9 95 1 9 96 1 99 7 19 9 8E 1 9 99 E

0

1 0

2 0

3 0

4 0

5 0

6 0

39 .5

32 .834 .3 33 .5

37 .2 38 .0

41 .544 .0

45 .8

Casillero del Diablo, launched in 1965, was the companys first step towards theproduction of more complex wines. The wine was made from selected grapes and agestwo 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, thecompany planned to ship about 30,000 cases, however because of the wines wideacceptance 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 tothe export division includes premium, varietal, varietal blend and sparkling wines, aswell as popular wines. The Companys popular wines are packaged primarily in one literTetra Brik packages.

Premium and varietal wines are gaining popularity in both the domestic and foreignmarkets and after gaining brand recognition outside the local market, the Company isnow focusing in increasing sales of both wines in all markets. However, in the domesticmarket VCO will also continue to promote popular wine, which has been the best sellerin terms of volume. In the foreign markets VCO will concentrate on fast growingmarkets, 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 boththe domestic and export markets. Variety of production means either planting newvarieties in existing regions or developing new areas within existing regions. Recently

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the Company introduced Sunrise varietal for both export and the domestic market. InArgentina, the Company is currently producing Trivento, a line of varietal and premiumwines, of which the varietal wines are already available worldwide.

Bulk Wine The company also sells wine in bulk form, in both the domestic and exportmarkets, 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 salesof bulk wine. Market conditions will determine whether the Company needs to sell winein bulk.

Vineyards/facilities

VCO has thirteen vineyards in Chile that are located in five of the Countrys sixprincipal wine growing valleys. Twelve of these vineyards are company owned whilethe 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 afourteenth 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 about3,349 hectares are suitable for planting vineyards. The average age of VCOs vinesclassified as producing, is 12 years. A vine is in its prime from ages 12-40, so the qualityof VCOs wine is just now reaching prime.

1996 1997

To ta l O w n ed H ec t a r es 4817.8 5 951 .2

T o t a l A r a b l e 2737.3 3 345 .9

N o t Yet P ro d u c in g @ 100 % 1097.6 9 05 .5

P r o d u cin g @10 0% 1358.2 1 906 .6

F a l l o w 281 .4 533 .8

Source: C ompa ny Reports

The Company relies on third-parties for 80% of its grape requirements. Foradditional grapes required for wine production, the Company relies on about 200independent growers and other wine producers in Chile, mostly for the production of itspopular wines. Many of these producers have been selling to VCO for many years solong-term relationships have been established. In the past, one-year contracts were thenorm, but more recently VCO has been signing longer term contracts with its keysuppliers to ensure a steady supply of high-quality grapes. The Companys cost structureis also enhanced from this new arrangement as the price of grapes is determined ahead oftime rather than on a spot market. Currently, the Company purchases 80% of its graperequirements from third parties. However, if we exclude grapes for popular wine, inwhich the Company purchases 100% of its requirements, the figure slips to 60%. In1996, one third of the grapes purchased for popular wines came from independent

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growers, while the remaining two thirds was purchased in bulk from other wineproducers. As mentioned previously, grapes for popular wines are a commodity, as aresult 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 itmaintains at least 40% self-sufficiency. Looking ahead, the sooner and greater self-sufficiency that VCO achieves on grape production the sooner the Company canimprove its cost structure and ensure the quality of its wine.

Throughout the last six years the Company has substantially expanded the cultivation ofgrapes on its Chilean vineyards, increasing from 1,207 hectares in 1992 to 2,812 hectaresin 1997. This enabled VCO to decrease dependency from outside parties and to bettercontrol the cost and quality of its grape supply. By comparison, the well known RobertMondavi 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 thebottling of Premium, varietal, varietal blend and sparkling wines. This plant, withcapacity of 7.6 million liters per month, is equipped with the latest bottling and labelingequipment and includes three bottling lines. These bottling lines fill five different

presentations, which include the popular 1 liter, and 750 ml bottles. In addition, thisfacility has a wine cellar that stores up to 2.5 million bottles for aging, as well as awarehouse 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 ofthe five liter glass jugs, and for the liter and half liter Tetra Brik packages. The TetraPak machines have a capacity of 6.6 million liters per month. The company leases fiveplants for the vinification of popular wine from purchased grapes.

DistributionAll domestic wines are distributed through Comercial Peumo, a wholly-ownedsubsidiary, which is Chiles largest wine distribution company with 85-90% market

penetration. This distribution company consists of 14 warehouse and 15 regional officesthat service approximately 14,000 customers throughout the entire country. In theUnited States, the Company distributes wine through Banfi.

EXPORT MARKETS

For the last fifteen years or so, per capita consumption of wine in Chile has beendeclining primarily as a result of increasing beer consumption, particularly among theyounger consumers, but more recently has leveled off at approximately 18 liters. As aresult many Chilean wine producers, including VCO, were forced to look outside thehome market for growth. In the last five years, exports of Chilean wine have increased ata compounded rate of 25% per year, reaching 216.3 million liters in 1997. Today, ViaConcha y Toro leads the market with approximately 20% of all Chilean wine exports involume terms, with the closest competitor, Via San Pedro, accounting for about 9% ofthe market.

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Figure 6. C o n c h a y T o roVolum e T rends - (M i ll ion L i t er s )

Source: Com pany Repor ts and BT A lex . Brown I ncorpora ted Research Es t ima tes1 99 1 19 92 1 99 3 1 99 4 19 95 1 99 6 1 9 97 1 9 98 E 1 9 9 9E

0

2 0

4 0

6 0

8 0

1 0 0

1 2 0

57 .4 53 .4 53 .5 56 .7

68 .3

74 .8

83 .5

90 .8

99 .8D om estic E xp o rt

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 revenuein the last five years have increased from 42.7% in 1992 to 53.7% in 1996, and reached55.2% of revenue in 1997. As a percentage of volume, export sales represent 50% oftotal wine sales and could reach 53% by the end of this year. VCO has a well developedand diversified export base. Chilean wines continue to gain recognition as qualityimproves. In 1997, the principal markets were the United States (36.3% of totalexports), 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 theeast and southeast coasts. VCO is the leading Chilean wine exporter to the UnitedStates, growing from US$2.0 million in 1989 to US$29.4 million in 1997, making it theCompanys 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 winesVCO sells for the export market are varietal, blended varietal, premium and sparklingwines. These are all packaged in glass bottles and produced from the proprietary grapeharvest.

Figure 7. C o n c h a y T o ro E x p o rt S a l e s b y R e g i o n(U S $M M )

Source: Company Repor ts19 9 3 19 9 4 19 9 5 1 99 60

5

1 0

1 5

2 0

2 5

U .S.

So u th A m er ica

Eu rop e

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On the export front, the Companys major Chilean competitors are Via Santa Rita, ViaSan Pedro and Santa Carolina. Most of the industry is focusing on the $8.00-$10.00 per750ml bottle, particularly the smaller wineries since they ship very limited volume.Competition for the Chilean wines comes mostly from California wineries, and to amuch lesser extent French wine. Both regions, Chile and California, produce wines inlarge quantities. Among the California wineries, we believe Mondavi, Glenn Ellen,

Sebastiani and Sutter Home would be the most comparable. Californian wines offer themost competition for the Chilean wines, since the US market is the domestic market forCalifornia 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 toFrench wines and more recently due to bad harvests which curtailed production.According to our unscientific poll of fifty friends, relatives and colleagues, the averageoff-premise US consumer finds Chilean wines comparable to California wines.However, most purchases were made because the buyer believed he/she was getting agood wine at a good price.

Quality control is imperative in this segment which is why the Company is aggressivelypursuing self-sufficiency in premium wines.

CHILEAN WINE INDUSTRY

Domestic wine sales can be characterized by the sale of popular wines which arepackaged in low-cost tetra pak containers. Popular wines are produced from lower-quality grapes or purchased from third parties. In general, these wines are sold at thelowest 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 ofdemand is closely tied to price among consumers. Grapes grown for popular wine aretreated 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 ismoving towards a higher-quality product. As we see it, the advantage for VCO is themarketing and distribution of this product.

Wine, at times is almost a perfect substitute for beer, and any changes in the price canaffect sales. In order to gain domestic market share the company has maintained pricecompetitiveness with other wine producers as well as with the beer market. As a resultthe Company introduced new wines targeted at different consumer segments, andincreased 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 domesticmarket is in tetra pak with Via Santa Rita and Via San Pedro (majority owned byCompania Cerveceria Unidas, S.A.) the two major competitors. Santa Carolina isanother significant, but declining player in the industry. Together VCO, Santa Rita andSan Pedro command approximately 60% of the market. The large wine companies tendto have larger market shares outside the main city of Santiago, because their large sizeallows for better distribution of the product.

The annual growing season in Chile is from October through March/April with theharvest taking place in March and April. For popular wines the period from harvest,

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fermentation, bottling and aged is approximately 3 weeks. The period for a premiumwine, however, can be up to three years. Last year the crop was lighter than expecteddue to the drought. Nevertheless, the quality of the grape was better since small sizegrapes allows for a more concentrated juice, a higher sugar content and a generally bettertaste and higher quality end product. The wines produced from the 1997 harvest areexpected to be of higher quality, further enhancing the reputation of the Chileanwineries.

FINANCIAL BACKGROUND AND LATEST RESULTS

Revenue. Over the past few years, exports have been contributing a greater portion ofthe Companys revenue while the domestic market share of revenue has declined from61% in 1990 to 37% at year end 1997. Other revenue, consists mostly of bottlingservices. Also included are some mineral water, liquor, fruit export sales and morerecently Via Patagonia. The level of sales has remained constant between 8-10% ofrevenue. Revenue growth for VCO since the beginning of the decade has been quiteimpressive, increasing from $54 million in 1991 to $144 million for 1997. (See figure8.).

Figure 8. C o n c h a y T o r oR e v e n u e & N e t I n c o m e ( $ U S M M )

S o u r c e : C o m p a n y Re p o r t s

1 993 1 994 1995 19 96 1 997 1 998R 1 999E

$0

$50

$100

$150

$200

$250

$0

$5

$10

$15

$20

$25

$30

$35

$40

$6 9$7 7

$9 0

$114

$144

$176

$209

$7 $6$8

$1 5

$1 9

$2 3

$2 7

R ev en u e N et In co m e

R ev en ue N et In co me

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 $32million, or 37% of total capitalization. VCO used the proceeds from the offering tolower debt to the $9 million level and over the years has been reduced even further. TheCompany would consider increasing the level of debt if internally generated funds wereinadequate for capital expenditures, but according to our calculations the Company hasample 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 volumecoupled with higher prices in both export and domestic markets.

VCO continues to build sales of varietal and premium wines thanks to the success ofTrio and Sunrise. As a rsult, during 1997, export revenue jumped 26.1% to US$80

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million, which resulted from a 24% increase in bottled wine volume coupled with higheraverage prices of 14%, compared to a year ago. More specifically, exports volumeincreased 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, remainedstrong throughout the year, growing 19% and 27% in volume terms, respectively, and35% and 37% in revenue (US$) terms. Additionally, exports to Asia continued to grow

dramatically, climbing 220% in volume (and revenue) terms. Japan and Taiwanaccounted for about 80% and 11%, respectively, of the Companys total exports to thatregion. 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 totalsales equivalent to less than 1% of volume.

Surprisingly, while the Chilean wine industry experienced price increases and lowervolume 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 higheraverage prices. Consequently, revenue jumped 22% to ChP$23,127 million (US$53million). Each of the premium, varietal and popular wines averaged a 22% increase inrevenue, 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 adecline 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 yearago. 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% ayear 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 otherwine business. Throughout the last five years the Company has reduced dependencyfrom outside parties and has been able to better control the cost and quality of its grapesupply. As a result the Company substantially expanded the cultivation of grapes on itsvineyards, 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 andprocessing 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 oneArgentina.

For the two year period 1997 and 1998, the company has budgeted about US$42 millionfor 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 thatcontinue 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 propertyin Chile; the planting of wine vines and development of the corresponding infrastructureneeded in certain company properties, including Argentina; to increase vinification andstorage capacity; and for the development of the joint venture with Rothschild, whichwill produce super premium wines.

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DIVIDEND POLICYBy law, Chilean companies have to pay out 30% of net income in the form of dividendsso long as retained earnings exist or tax loss carryforwards do not. Historicallymanagement has maintained a payout ratio of at least 30%, which translates intoquarterly dividend payments of ChP 1.10/share. Looking ahead, we believe theCompany has ample room to maintain, if not increase the payout ratio, based on ourexpectations 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 suchsecurities, 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.

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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

CONSUMER/BUSINESS SERVICES

Marcia L. Aaron Lifestyle Retailers, Consumer Products .....................(415) 477-4258

H. Perry Boyle, Jr., CFA --Business & Consumer Services.................... (410) 895-3215

Christopher A. Feiss --Business & Consumer Services ............................(410) 895-3259

Kathleen Heaney Latin American Food/Beverage Retail .......................(212) 250-6805

Chad Jacobs --Leisure Services & Products.............................................(212) 250-1752

Patrick F. McCormack, CFA --Broadline Retailers, Auto-Related. ........(212) 237-2009

Barbara E. Miller Value Retailers, Consumer Services.........................(212) 237-2146

Mark Mutkoski Lodging........................................................................(212) 250-9694

John M. ONeil Food & Beverage..........................................................(212) 250-1668

Maria Medaris OShea -- Apparel Retailers ................. ..........................(410) 895-3231

Steven A. Rockwell, CFA --Restaurants. ................................. ................(410) 895-3344

Thomas M. Ryan Gaming, Leisure Services & Products. ......................(212) 250-7340

David A. Trossman, CFA --Restaurants..................................................(410) 895-3330

Christopher E. Vroom, CFA -- Specialty Hardlines.................................(415) 732-3019

Joyce A. White -- Food Retailers. ....................... .......................... ............(212) 250-7355

ENERGY/POWER

Barbara Coletti Utilities, Electrical .................... ..................... ..............(212) 250-2039

C. K. Poe Fratt -- Oil Field Services, Offshore Drilling............................(212) 250-1694

Holly R. Gustafson, CFA International Integrated Oils.........................(410) 895-3388

Adam E. Sieminski, CFA International Integrated Oils ........................(410) 895-3347

Edward J. Tirello, Jr. Utilities, Electric, Gas & Water..........................(212) 250-2826

David J. Wheeler, CFA Exploration & Production................................(212) 237-2179

FINANCIAL SERVICES

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

HEALTH CARE

Peter H. Emch, CFA -- Hospitals, Home Care ..................... ...................(410) 895-3293

Ann C. Gallo --Health Care Information Technology. ............................. (617) 261-3696

Andrew T. Jay -- Medical Technology, Hospital Supplies........................(617) 261-3634

Eleanor H. Kerns, CFA --Managed Care, Practice Management. ..........(617) 261-3624

Jonathan W. Osgood, CFA --Medical Technology, Products, Supplies... (617) 261-3622

Barbara A. Ryan -- Pharmaceuticals, Distribution ..................... .............(212) 237-2340

Jean L. Swenson --Nursing Homes, Assisted Living. ............................... (617) 261-3610

Kevin C. Tang --Biotechnology, Laboratory Products............................. (212) 237-2293

MEDIA/COMMUNICATIONS

Shaun G. Andrikopoulos -- Internet & Interactive Services ......................(415) 477-4234

Peter P. Appert, CFA -- Publishing, Education, Information Services......(415) 477-4240

Jeffrey L. Hines Wireless .......................................................................(212) 237-2106

Christopher M. Larsen, CFA Wireless..................................................(212) 237-2386

Andrew W. Marcus, CFA -- Broadcast, Entertainment, Outdoor.............(212) 237-2081

Lawrence F. Marcus -- New Media...........................................................(415) 477-4202

Mark McFadden -- International Media ....................... .......................... ..(212) 250-8696

Kevin M. Moore -- Communications Services ......................... ..................(410) 895-3329

TECHNOLOGY

Cato D. Carpenter -- Computer Services. ............................. ....................(410) 895-3269

Edward S. Caso, Jr., CFA -- Computer Services. ................................. ....(410) 895-3381

Christopher J. Crespi -- Telecommunications Equipment. ........................(415) 477-4278

Michael B. Gordon -- Telecommunications Equipment ...................... .......(415) 477-4251

Erika Klauer -- Semiconductors. .......................... .......................... ...........(212) 237-2234

Mary A. McCaffrey --Enterprise Software, Internet Software. ................(212) 237-2441

Brian T. Modoff-- Wireless Equipment. ................................. ..................(415) 477-4237

James A. Moore --Enterprise Software.....................................................(415) 477-4269

W. Christopher Mortenson --Enterprise Software...................................(212) 237-2432

Philip C. Rueppel -- Computer Systems, Digital Imaging..........................(415) 477-4264

James J. Savage -- Electronics Manufacturing ............................... ...........(212) 237-2393

James P. Wade --Networking. ...................... .......................... ..................(410) 895-3237

Bruce Walicek -- Semiconductors, EDA ...................................................(415) 477-3298

Byron N. Walker -- Semiconductor Capital Equipment.............................(212) 237-2098

TRANSPORTATION

Wolfgang H. Demisch -- Aerospace, Defense................................. .......... (212) 250-8895

Susan M. Donofrio -- Airlines .................................................................(212) 237-2238

Anthony P. Gallo, CFA -- Trucking ........................................................ (410) 895-3275

Christopher H. Mecray --Logistics, Aviation Services. ........................... (410) 895-3266

Ira H. Malis --Associate Director of Research ....................... ..........(410) 895-3267 Ivy T. Fradin, CFA --Associate Director of Research.... .................(410) 895-3385

Anita W. Gallitano --Director of Administration & Operations .......(410) 895-3255 William L. Paternotte, CFA -- Chairman of Investment Committee.(410) 895-3334

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