Earnings Call: H2 2020

Jun 19, 2020

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy's annual results briefing for FY 2019 and 2020. Before we start, I would like to introduce you the senior management of Vitasoy Group. Sitting in the middle of the head table, we have Mr. Winston Lo, Executive Chairman of Vitasoy Group. Good afternoon. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Good afternoon. On the left-hand side of Mr. Lo, we have Mr. Chris Lau, Group Chief Financial Officer. Good afternoon. In the following presentation, we will have Chris to provide us with a review on the company's financial performance, followed by Roberto's presentations on the business review in different markets and outlook. Before we start, you should see a Q&A input box at the bottom of the screen. Please feel free to drop us your questions any time during the presentations. During the time constraint, we might not be able to address some of your questions during the sessions. For all the remaining questions, we will address to you individually afterwards. Now, let's invite Chris to speak to us. Chris, please. Thank you. Good afternoon, ladies and gentlemen. Welcome to our financial results announcement briefing. Now, before we start our presentation, I would like to draw your attention to this disclaimer regarding the forward-looking statements in this presentation. Now, let's look at our financial performance in the second half. The final 6 months of the fiscal year 2019/2020 saw an increase in extraordinary external events disrupting our business, like escalating social unrest in Hong Kong, drought in Australia, and finally, COVID-19 affecting us in all our operating units. As a result of this, revenue in the second half decreased by 17%. Gross margin for second half was 51%, 2 percentage points lower than the previous period, mainly due to lower manufacturing efficiency as a result of dropped sales volume and higher material prices such as soybean and milk powder. Our profit decreased substantially, mainly driven by lower revenue and gross profit as a result of outbreak of COVID-19. Despite the significant impact from these events, we were able to still break even on a profit to shareholders basis. Now, let's move on to the financial performance for the full year. Given our performance the second half, our total fiscal revenues decreased by 4% to HK$7.2 billion. On a constant currency basis, that decrease would only be 1%. Gross margin decreased by one percentage point to 53%, driven by lower sales volume in second half of the fiscal year. EBITDA for the year was HK$1.1 billion, decreased by 11%, mainly driven by lower gross profit. Profit before tax decreased by 29% to HK$679 million. Lastly, profit to shareholders decreased by 23%. As such, basic earnings per share decreased by 23%. Now, the board of directors declare a final dividend of HK 28.4 cents per ordinary share. Together with the interim dividend of HK 3.8 cents we declared last year, the total dividend for the year is HK 32.2 cents. Now, let's move on to capital expenditure. Capital expenditure incurred during the year increased 8% to HK$1.06 billion. The capital expenditure was mainly related to construction of new plant in Dongguan, upgrade program in Hong Kong, and addition of new product lines. All these programs are either on track or completed. Now, let's look at the financial position of the group. It remains strong. As at March 31, 2020, our cash and bank deposit was HK$848 million. Our bank borrowings was HK$241 million, mainly for CapEx in Australia and new plant in Dongguan. Our gearing ratio of the group increased to 16%. If we exclude the lease liabilities due to the new accounting standard, HKFRS 16, this year from total borrowings, the gearing ratio as of March 2020 would be 8% only. The group's return on capital employed, ROCE, decreased to 31%. Now, this ends the first section of the presentation. Now, I would like to invite our group CEO, Mr. Roberto Guidetti, to share with you the by market review and talk about the outlook of the group's business. Thank you. Thank you, Chris. Good afternoon to all of you, and again, welcome. Let me share with you the review of our business overall and by geography. Our short-term results have been temporarily affected by COVID-19. Initially in mainland China, given our infrastructure in Wuhan, the epicenter of the outbreak. This was followed by lockdown and disruption in all of our markets. Net of currency impact, the revenue and operating profit of the group decreased by 1% and 25% respectively. Our underlying business strength is solid. First, we have continued to grow market shares in the mainland China regions where we compete, and also in Hong Kong, on both Vitasoy and Vita. Second, we have protected the health of our employees and the integrity of our infrastructure. Third, our innovation pipeline on core categories is strong, and in addition, we have also continued to accelerate progress in our ESG sustainability deliverables. I will share these improvements with you in the final section of this presentation. Looking ahead, given some remaining uncertainty in external conditions, we will continue to pace our investments, reduce costs, and continue driving operational efficiency while we gradually restore our growth trajectory on both revenue and profit, starting from mainland China, which has shown encouraging signs of recovery in this April to June quarter. Moving to results overview by geography. For the second half, mainland China and Hong Kong declined in both revenue and operating profit, driven by extraordinary events mentioned earlier. In both markets, hypermarkets, supermarkets, and online did well, but convenience stores, general trade, and on-premise suffered due to the lockdowns. In Hong Kong, the schools closure further aggravated the situation, completely halting our Vitaland business, which is serving schools. Australia grew revenue but dropped in operating profit, mainly due to lower gross margin as a result of higher raw material prices. While Singapore delivered revenue growth and also very strong profit growth versus last year. For the full year, mainland China, Australia, and Singapore all have grown revenue in local currency, but the Hong Kong dollar's performance have been impacted due to the unfavorable exchange. On the operating profit, mainland China, Hong Kong, and Australia declined, while Singapore, as expected, recovered the drop in profit during the first half by a significant growth, better portfolio and channel mix, and efficiency improvement. As a result of all this, mainland China maintain a 62% of the group's full year revenues, followed by Hong Kong at 29% and Australia, New Zealand at 7%. When we are looking at this from the operating profit-wise, the geographical balance is quite in line with the revenue. Let us now start the segmental review for the full year result with mainland China. Mainland China revenue increased to HKD 4.5 billion, up 1% in renminbi revenues, but down in operating profit by 24%. Renminbi depreciation affected negatively our results in Hong Kong dollars. COVID-19 disrupted both our manufacturing and commercial operations, starting from its first inception in Wuhan and then expanding to the whole country. Lockdown drastically cut physical shoppers traffic, impacting very significantly the convenience general trade stores and the on-premise outlets, which are quite critical to our business. Hyper and supermarket channel did somewhat better, whilst e-commerce performed very strongly towards the end of the fiscal year, thus confirming strong shoppers preference for our equities on a national level. As COVID-19 reduced total market sizes consumption, we continued to grow market shares on both Vitasoy and Vita, proving again the strong relevance and appeal of our portfolio. Beyond protecting our employees and assets, we took special care on progressing our critical infrastructure investment. Within these, we are pleased to report that despite some inevitable delay, the construction of our new plant in Dongguan is progressing well and is expected to commence production as planned in 2020. When we look forward for mainland China, we will continue to strengthen the equities of both core brands. On Vitasoy, we will drive our Vitasoy Classic by promoting its consumption occasions and continue to expand its presence across provinces and channels. Whilst for Vita, we will add new innovative items and expand this portfolio as we continue to drive its growth. Mainland China is expected to return gradually to revenue growth, as we have seen already sign of recovery. We have planned to reduce costs whenever possible while protecting ability to accelerate once COVID-19 has passed. In the long term, we stay very confident about the potential of plant-based products in mainland China. Let us now review progress in our home base, Hong Kong. Hong Kong revenue and operating profit dropped by 7% and 14% respectively as a result of the combined impact of ongoing social unrest and outbreak of COVID-19. In Hong Kong, these events affected us disproportionately due to our Vitaland schools business. This business was totally stopped first in November 2019 due to social unrest, and then again in February, March, due to COVID-19. We offset part of the inherent fixed costs by a number of interventions, but still suffered inevitable short-term profit deterioration, which contributed 50% of the total Hong Kong profit loss. Encouragingly, whilst market sizes decline, our market shares on both brands, Vitasoy and Vita, continued to grow, confirming our strong brands' appeal. In the coming fiscal year, we will continue to drive our brands, Vitasoy and Vita, with quality execution of fundamentals, whilst also advancing selective innovation with focus on healthy segments. While staying vigilant and pacing our investments in the short term, we have a strong product innovation pipeline, making us confident that we will gradually restore our growth trajectory as the pandemic subsides, supported by our manufacturing and commercial infrastructure, which has meanwhile completed its renewal program. Let's now move to our overseas businesses, starting from Australia and New Zealand. For Australia and New Zealand, in local currency, we grew revenue +3%, while operating profit decreased by 11%. In Hong Kong terms, revenue and profit decreased by 4% and 17% respectively due to the Australian dollar's depreciation. An especially severe drought affected the soy harvest, disrupting our sourcing of local soybeans, hindering our ability to maintain supply to customers on our soy platforms, whilst increasing our material costs. Although we have successfully secured alternative source of non-GMO soybeans from the U.S., we expect margin to stay under pressure in the short term. Thanks to the introduction of our new products, we were still able to grow revenue and stay profitable despite the challenges from extreme weather, drought, and COVID-19. We have planned to sample our new single-serve Vitasoy Whole, as shown on the slide, these new products. I promise you that we will bring this new line back to you once the COVID-19 has been contained and we will have the pleasure again to meet you face to face. Let me now close the segmental review by covering our Southeast Asian markets, starting from Singapore. In Singapore, we grew revenue by 6% in HKD and 8% in local currency, mainly driven by strong performance of our core local and export tofu business, while we continue to grow our beverage portfolio. Operating profit recorded a significant jump due to a combination of top-line growth, better portfolio and channel mix, higher efficiency, and cost management. We will continue to scale up this operation. Let's close the by-market review via a brief update on our business in the Philippines. Our local production line has successfully started manufacturing, enabling us further flexibility, cost reduction, and customization. Although COVID-19 has put it on hold, we expect the facility to provide us momentum to recover during a post-COVID-19 era. We have also enhanced our product portfolio, adding more SKUs to cater to the growing demand for healthy plant-based nutrition in the Philippines. Before we conclude the presentation today, I would like to give you an update on our progress on sustainability. Our sixth annual sustainability report will be available on our website on July 14th. In this year's report, we continue to disclose our progress on portfolio and energy KPIs that I will cover in more details later in this presentation. We have also systematized and deployed a number of our company practices into formal policies to accelerate the sustainability agenda and consistent management approach throughout the whole Vitasoy Group. We have achieved early compliance on the Hong Kong Stock Exchange upgraded ESG reporting requirements and have continued to align our disclosures to international standards. We have also moved recurrent but relevant contents from the report to a special section of our corporate website dedicated to sustainability information. This will reduce year-on-year repetitive messages in our sustainability report while preserving important information in our website. On the progress on product portfolio, our goal is to increase the percentage of products in our portfolio which are plant-based, enhanced nutrition, and reduced fat and sugar content. In fiscal year 2019-20, all four KPIs have performed ahead of our 2020-21 goals. First, on plant-based beverages, we have reached 91%, meeting the goal of maintain equal to 90%. On nutritious plant milk beverages, we have reached 96%, meeting the goal of maintain more or equal 95%. On low fat, low saturated fat, and zero trans fat beverages, we have achieved 94%, meeting the goal of maintaining strong or equal ahead of equal 93%. In the fourth goal, percentage of our offering with sugar content from moderate to zero, we have achieved 80%, ahead of the 2020-21 goal of 76%. We are committed to continue to improve, and we further revise the goals upwards upon sustained achievement of these results. On packaging, we have continued our efforts in carton, plastic, glass, and aluminum. These are the main achievements for each of them. On carton, we have achieved 100% use of carton sourced from FSC sources, which means they are from sustainably managed forests. On plastic, we have launched 100% recycled PET bottle on Vita Water in Hong Kong. On glass, we have maintained our glass bottle recycle rate ahead of 90%. On aluminum can is the packaging with the highest recycling value and thus the highest recycling rate in the market. We will continue to support this recycling activity. Further details on our efforts are included in our sustainability report. Regarding our progress on energy reduction, the COVID-19 outbreak has significantly disrupted our economies of scale and plans in this area, but we still maintain a meaningful reduction versus our 2013-14 base year. We will work to restore our improvement trajectory in the new fiscal year. For water, we have used 15.8% less than our base year, 2013-14. For fuel, we used 15.4% less. For electricity, a slight setback, but still with an 11.1% reduction. We are confident that once we can resume normal operations, we will gradually achieve a better resource efficiency, thus restoring progress towards our longer-term goals. On okara, we have now achieved 99.4% recycling rate from 95.5% in the previous year. Let me conclude this KPI review by confirming that we continue to work to broaden our sustainability framework to also include more KPI setting and progress on more material areas, in particular waste, supply chain, workplace, and community contribution. We believe we can do this within our existing framework of making the right products and making products the right way, which I show you updated here in this slide. This framework will also be included in our sustainability report. Our performance and broadening of our impact has enabled us to make significant progress in our external ESG rating results. As our business scale has grown, we have been invited to participate in more major global ESG rating assessments. Our ESG efforts have delivered clear results. There were two notable achievements in this fiscal year. We have been included in the Hang Seng Corporate Sustainability Index as a constituent company, which means we are one of the top 30 Hong Kong-listed companies in terms of sustainability performance. We have also achieved international recognition by entering the Corporate Knights Top 100 global sustainable companies for the first time, and we are also the only company from Hong Kong making this list. To support our consistent improvement, we have introduced a board-level ESG committee this year. This committee will review recommendations from the management team and provide directions on ESG strategies. The ESG committee provides us with stronger governance and direction to continue to accelerate our ESG progress. In summary, whilst our short-term results have been temporarily affected by COVID-19, our underlying business strength is solid. First, we have continued to grow market shares in the mainland China regions where we compete and also in Hong Kong on both Vitasoy and Vita. Second, we have protected the health of our employees and the integrity of our infrastructure. Third, our innovation pipeline on core categories is strong. We have also continued to accelerate progress in our ESG deliverables. Looking ahead, given some remaining uncertainty in external conditions, we will continue to pace our investments, reduce costs, and continue to drive operational efficiency while we gradually restore our growth trajectory on both revenue and profits. Starting from mainland China, which has shown encouraging signs of recovery in this April-June quarter. This concludes our presentation. We can now open up for questions. Thank you very much.