Earnings Call: H2 2018

Jun 15, 2018

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy annual results briefing for FY 2017 and 2018. Before we start, we would like to introduce you to 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. Thank you for coming. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Good afternoon. Thank you. 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 first 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. It is followed by a Q&A session. May I now invite Chris to speak to us? Thank you. Good afternoon, ladies and gentlemen. Welcome to our final result announcement briefing. Before we start our presentation, I would like to draw your attention to this disclaimer regarding the forward-looking statements in the presentation. Okay. Now, let us look at the financial performance for the year. During first half of fiscal year 2017-18, we were able to achieve double-digit growth. The momentum sustained during second half, with revenue increased by 18% when comparing to the corresponding period in fiscal year 2016-17. Now, we were able to maintain the gross profit margin despite an increase of raw material prices. As such, our bottom line delivered a strong growth. Profit to shareholders increased by 18% in the second half of fiscal year 2017-18. Now, let us look at the result, for the full year. Given our performance in the second half, our annual revenue increased by 21% to HKD 6.5 billion, with all operating entities registering revenue growth, particularly for mainland China. Gross profit increased by 19%, mainly driven by the strong sales performance. Although commodity prices, particularly for sugar, milk powder, and paper carton, were unfavorable to us, our improved manufacturing efficiency resulting from increased sales volume enabled us to sustain gross profit margin level. Let's look at EBITDA. EBITDA for the year was around HKD 1 billion, increased by 19%. The increased EBITDA was mainly driven by higher gross profits. Profit before tax increased by 22% to HKD 803 million. The improvement was mainly due to increase in gross profit, partly offset by the growth in operating expenses. Profit to shareholders increased by 14%, mainly due to improvement in operating profits, partly net off by increase in income tax, mainly due to mainland China. This performance was ahead of our goal to deliver sustainable growth. Next, let's look at the impact of currency. As you can see from this slide, appreciation of renminbi, Australian dollars, and Singapore dollars have increased our level of growth in Hong Kong dollar terms. On a constant currency basis, revenue and profit to shareholders increased 18% and 11%, respectively. Let's look at the basic earnings per share. If we include the impact of North American divestiture in FY 2016-17, basic earnings per share grew by 13%, from HKD 49.1 cents to HKD 55.5 cents. But if we include the impact of North American divestiture, basic earnings per share dropped by 6%. Let's look at dividend. As the group would like to share the success of strong performance with our shareholders, the board of directors declared a final dividend of HKD 31.4 cents per ordinary share, with 16% growth compared to final dividend payment last year. Together with the interim dividend of 3.8 cents we declared last year, the total dividend for the year is 35.2 cents, which is consistent with the growth of profit to shareholders, excluding the impact of North American divestiture. Next, let's look at capital expenditure. Capital expenditure incurred during the period increased 117% to HKD 428 million. The capital expenditure was mainly related to acquisition of new production lines and investment in the upgrade of existing production machineries in both Hong Kong and mainland China. Let's look at financial position. The financial position of the group remains strong. As at 31st of March 2018, our cash and bank deposits increased by 16% to HKD 986 million. Our borrowings reduced by 87% to HKD 28 million as various capital expenditure projects were completed and we started to repay the borrowings using internally generated cash. As such, you look at a gearing ratio. The gearing ratio of the group decreased to 1% at the end of March. In terms of ROCE, the group's returns on capital employed decreased to 35% as at 31st of March 2018, due to the fact that a one-off gain from U.S. divestiture was generated in prior year. This ends the first section of the presentation. I would like to invite our Group Chief Executive Officer, 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 top-line review of our business overall and by geography. Our second half performance has kept exceeding our target, and our revenues in second half grew +18% comparing to previous year, and operating profit grew 26%. As a result, we have sustained strong performance for the full year as follows. Our biggest market, China, continued to sustain strong growth of 39% during the total fiscal year, able to sustain the momentum of the first half. While in Hong Kong, top-line growth was modest, but lots of important work is being led on increasing factory and logistic infrastructure performance and efficiency. Our overseas business continues to grow, including our new JV in the Philippines. On sustainability, in this year, we've accelerated on our KPIs, and in most of them, we are now ahead of our original 2020 goals. In the coming year, we will reset and broaden them to make an even bigger impact. Going forward, for the next fiscal year, we expect that the growth to be a bit more moderate, yet solid. At the same time, we will continue to increase our investments in brand equity and infrastructure to secure we can deliver the upcoming growth and sustain our target position in the long run. After this, I'd like to now move towards the by-market review. The overall message is that all markets were up in revenue. China, Australia, and Singapore also benefited from favorable currency appreciation, thus increasing the reported Hong Kong dollar revenue. As for the operating profit growth outpaced revenue in both mainland China and Australia, mainly due to higher capacity utilization. Hong Kong profit decreased as we're investing for our manufacturing upgrade program, whilst in Singapore, we contracted behind increased investments, particularly in advertising and promotions and enhanced organizational capabilities. As a result of all this, mainland China is now 57% of our group full-year revenue, followed by Hong Kong at 33%, and Australia and New Zealand at 8%. Profit-wise, the geographical balance is quite in line with revenue due to the fact that mainland China has delivered a strong bottom-line performance. Let me therefore start the segmental review for the full year result with mainland China. Mainland China grew revenue by 30% for the full year, cycling last year's growth of 11%, behind the effective execution of our Go Deep Go Wide strategy, complemented by stronger brand equity impact and e-commerce growth. Both brands, Vitasoy and Vita, performed strongly. The operating profit grew by 71%, cycling last year's growth of 13%, primarily driven by higher capacity utilization. Although there were price pressure on raw materials, our increased manufacturing efficiency enabled us to achieve strong growth in operating profit. Going forward, we are increasing our investment in Vitasoy brand equity to complement our sales and commercial activities, whilst we are also gradually increasing our physical presence in China with our own infrastructure. As mentioned earlier, e-commerce has accelerated its contribution, helping us to scale up our business. The combination of stronger brand equity efforts and expanded presence enables higher awareness and trial of our portfolio. We will continue this approach in the new year, 2018-19. Here, I would like to show you one of the new Vitasoy Classic mainstream commercials that we will be airing in mainland China during 2018. Can we please show the TV scene? That's Mainland China, and I'd like to move to our home base, Hong Kong now. Hong Kong, over the last fiscal year, has delivered moderate revenue growth of 2%. Both brand, Vitasoy and Vita have grown, particularly thanks to new product offerings. To increase our manufacturing and logistic efficiency in our Hong Kong factory, we have started a two-year investment program to ensure adequate capacity and more efficient process. On the operating profit, we recorded an 8% decrease. This is because we have increased investment in our brands, organization, and also the just mentioned upgrade program. We look at Hong Kong as a growth market despite its very high per capita development of our products. In 2018, we plan to continue driving our core with a new wave of communication supporting it. Here is our latest TV commercial, also for Vitasoy Classic, that we have just started airing. Can we please see the Hong Kong commercial? Yes, yes, yeah. Mama said take it slow. Listen to your heart. Hold on to your hope. The truth is the way to make a miracle. Vitasoy. Forever V. From Hong Kong, we move to our overseas businesses and starting from Australia and New Zealand. In Australia and New Zealand, we grew 6% for revenue, and we grew 9% for operating profit, also enabled by the appreciation of the Australian dollar, which contributed around 4% growth. We are sustaining our plant milk leadership, and we continue to improve our in-store execution, distribution, and activation across channels in what is becoming an increasingly fragmented, innovative, and price-competitive marketplace. We have increased our investment in advertising and promotion behind the new integrated marketing campaign, which also includes a whole new packaging, graphics, and communication. You can see the products here in the room at the back, in the fridges, and I hope that a number of you, of all of you, have had a chance to try them, the taste and the nutritional benefit. Basically, this is the look that we have in Australia at present. Here also, we would like to show you the TV commercial that has been supporting this restage. Can we please see the Australian ad? Look at all that milk. Milk as far as the eye can see. Milk, milk, milky milk. Milk. For over 70 years, Vitasoy has been turning plants into milk with added goodness. Hmm, delicious plant milk. Vitasoy, growing milk since 1940. This ad has generated a lot of talk, okay? We are very pleased with it. Let me move to the segmental review for Singapore. We talk a bit about Southeast Asia, starting from Singapore. The Singapore dollar appreciated. It drove revenues by 3%. In local currency, we were flat in the course of the last fiscal year. What happened was that we grew on tofu, primarily behind our Vitasoy premium tier, but this growth was offset by a bit of softness in the imported beverages. We will continue to sustain our tofu market leadership, and at the same time, we are evolving the model for our beverage business. For the operating profit, we will continue to deploy investment in advertising, infrastructure, and people because we want to scale up this business. Now, let me close the by-market review with a brief update on our business in the Philippines. Vitasoy has now been in the Philippines for less than one year, so at this stage, our focus is to continue our launch efforts to drive brand awareness and brand trial among Filipino shoppers. Our 50/50 JV collaboration with URC is effective, and as we announced a few months ago, the soy category and market in the Philippines has a lot of room for further growth. Therefore, our efforts are focused on clearly communicating the category benefits, the quality, and the convenience of our Vitasoy offering. This strategy seems to be working because initial data show that our Vitasoy business is adding volume to the category. We have recently edited a new piece of communication that we have now started airing in the Philippines, so we would like to now show it to you. On-the-go goodness that you can enjoy any time of the day, that is real healthy, made easy. Vitasoy, your nutritious, protein-rich snack on the go. Vitasoy, the soy experts. All right, this closes the by-market review. Like we normally do in June, I would like now to review our progress on sustainability. This will be included in our fourth annual sustainability report, which is the one on your right here, that will be available on our website on July 15th. Our Vitasoy mission is to provide tasty, plant-based, sustainable nutrition. Therefore, sustainability for us is a critical part of our corporate positioning. Our sustainability KPIs are articulated along two simple axes, and we put that big installation there so you can see very easily. First, making the right products. That's the first vector, improvement in our product portfolio. Secondly, making products the right way, improvements in our resource management and environmental footprint. We have a lot of work ahead of us in this area, but we are improving. In FY 2017-18, you will see that we have already achieved most of our original 2020-21 KPIs, progressing ahead of our original expectation. Let me start by sharing with you the portfolio goals and our trajectory here. On portfolio, our goal is to increase the percentage of plant-based products in our portfolio, enhance nutrition, reduce sugar and fat content. We also include packaging material as one of our portfolio KPIs, and this is an area where we plan to expand and accelerate impact going forward. As you can see from the data, in FY '17-'18, we are ahead of our original '20-'21 goals. For plant-based beverages, we have reached 89.5% of all our SKUs, of all our products, are basically plant-based. By plant-based, we mean primarily made up of plant-based ingredients like soy milk, almond milk, coconut milk, tea. Second, nutritious plant-based beverages reached 90%, ahead of the goal of 89% that we had for 2020-2021. On low fat, low saturated fat, and zero trans fat beverages, we achieved 92% of all our products, again, ahead of our goal 2020-2021 that we set at 91%. Then we have a goal on packaging. The goal on packaging is on employing Forest Stewardship Council certified paper which is coming from forests which are managed sustainably by certification. Here we achieved 91%, ahead of our original goal of 90% in 2020-2021. At the same time, we have made progress on percentage of our offerings with sugar content from moderate to zero. Moderate is 7.5% to 100 grams. We are now at 68% of our SKUs. We were at 62% 2 years ago. We are continuing to improve. We are quite confident we will be able to increase this ratio. During 2018, we will reset our goals because we have beaten some of them, and broaden our KPIs to keep accelerating towards our 2025 and '26 destination to make a bigger contribution in this area. Second area of our sustainability focus is making products the right way and energy use. In our report, we describe our commitments here in manufacturing, operations, workplace, and community. Also here, we're ahead of our original KPIs on water, fuel, and electricity. The way we express these KPIs is how much water do we use per unit of product, how much electricity do we consume per unit of product, and so on. Here, what you can see from the slide is that for water, we have used 17.65% less water when compared to our base in 2013-2014, ahead of our original goal of reducing by 10% in 2020-2021. For fuel, we used 16.9% less, ahead of our goal of 15%. For electricity, we achieved a 15.77% reduction, ahead of our goal of 10% in 2021. For okara is the solid residue from the soy manufacturing process, that we normally recycle. We stay committed to an extremely high recycling rate, 95% up of that. We are now ahead of our original 2021 goals. Because of this, we are going, during the year 2018, relook at these KPIs and set more ambitious glide path going forward. We stay committed to keep accelerating our competence and our impact in this area. I look forward to engage on how we broaden and intensify this effort while sustaining our business results. To read the report, which is a full report, please go to our website, vitasoy.com, as of July 15th, and you will have it there. In summary, our annual performance has exceeded our original target that we had for the full year. In addition to the financial results, we have made progress on our geographical priorities and on our sustainability efforts. In the next fiscal year, we expect the growth to be a bit more moderate, yet solid. We will continue to increase our investments in brand equity and infrastructure to secure we can deliver sustainable growth and achieve our desired long-term position. To close, like every time, I recap here our Vitasoy growth model. We basically start from a consideration that we judge the shopper, consumer, market, retail trends to be in the favor of our portfolio and of our company mission. We call this market tailwinds. We then believe that we now have significant competencies in our brands, in our quality, in our infrastructure, in our people. Our focus is to build further our team's capacity and capability to deliver sustainable growth. We use the vectors of execution, expansion, innovation to secure our long, long-term success in our business. We stay determined to scale up our business and growing our market shares in the cluster where we compete. In doing so, we will continue to increase investments in our brand equities, infrastructure, and management capabilities to secure that our growth is sustainable and it results into a creation of a cohesive and integrated business. In this sense, our presentation, and now we can open up for Q&As. Thank you.