Earnings Call: H2 2017

Jun 23, 2017

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy annual results announcements for FY 2016 and 2017. 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. 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 presentations, we will first have Chris to provide us with a review on the company's financial performance, followed by Roberto's presentations on the company's operations in different markets and outlook. We will then have a Q&A session. May I have Chris to start first? Okay, thank you. Good afternoon, ladies and gentlemen. Welcome to our annual 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. Okay. As said in November 2016, our revenue outlook in the second half of the fiscal year would be better. Excluding the divestiture of the North American mainstream and San Sui business, we recorded a better second half performance in our net sales. The revenue grew 10% in the second half versus 3% in the first half. Now, in May 2016, we divested our mainstream and San Sui business in North America for a consideration of US$51.4 million, and recorded a total pre-tax gain of about US$24.4 million for the whole project. As a result, Vitasoy USA ceased to be a local manufacturing business, and the divestiture business now falls under the Hong Kong operation, focusing on driving sales growth of its business in beverage imported from Hong Kong. In the following presentation, I will be presenting some of the KPIs such as net sales in two lines. One is for the total company and the other is net of divestiture. This ensures that we are comparing this year and last year on the same basis. Due to the VUSA divestiture, the group overall recorded a net sales decrease of 3%. Excluding the impact of this divestiture, the group actually achieved a year-on-year sales increase of 6%. Profit attributable to equity shareholders increased by 16%. This significant increase was partly due to the net gain from the VUSA divestiture, most of which will be reinvested into the development of the group's core operating markets. Net of the divestiture gain, the underlying profit attributable to equity shareholders of the company grew only 2% due to enhanced manufacturing efficiency. This performance was in line with our sustainable growth strategy in the context of increasing volatile economic conditions and rising competitive pressure in our core markets. On a constant currency basis, net sales maintained at the same level as last year, while profit to shareholders increased to 20%. It was mainly due to the impact of the VUSA divestiture. Net of this VUSA divestiture, the group actually achieved a year-on-year increase of 8% in the top line and 6% increase in the bottom line on a constant currency basis. Let's look at net sales. As illustrated previously, during this financial year, the group's net sales decreased 3% to HK$5.4 billion due to the divestiture of the VUSA business. Excluding the impact of the divestiture, we achieved an increase of 6% against last year in Hong Kong dollars. Let's look at gross profit. The gross profit for the year increased 2% to HK$2.9 billion. It was driven by an increase in sales and improvement in gross profit margin. In terms of the gross profit margin, it has also increased by two percentage points from 51% to 53%, mainly due to improved manufacturing efficiency, as I mentioned before, and also increase in volume and also non-recurring favorable commodity such as milk powder and soybeans. Let's look at EBITDA. EBITDA improved by 33% to HK$1.083 billion. Excluding the impact of the VUSA divestiture, EBITDA increased by 6%. The increase of EBITDA was mainly driven by higher gross profit and also cost savings. Profit before tax. During the period, the profit before taxation improved by 41% to HK$844 million. Excluding the impact of the VUSA divestiture, profit before taxation improved by 3%. The improvement was due to a reduction in net finance cost in spite of moderate increase in depreciation and amortization charges. Profit attributable to equity shareholders recorded an increase of 16% to HK$618 million. Excluding the impact of the VUSA divestiture, profit to equity shareholders increased by 2%, mainly due to improvement in operating profit and reduction in net finance cost. Basic earnings per share. As a result, basic earnings per share grew 16% to 58.9 Hong Kong cents and increased by 1% when excluding the impact of the VUSA divestiture. Now, as far as dividend's concerned, as the group would like to share the success of the strong performance with our shareholders, the board of directors declared a final dividend of HKD 27.1 cents per ordinary share, with 2% growth compared to final dividend payment last year. Also, in view of the one-off net gain from the VUSA divestiture, the board of directors also declared a special dividend of HKD 4.2 cents per ordinary share. Together with the interim dividend of HKD 3.8 cents we have declared, the total dividend for the year amounted to HKD 35.1 cents, with 16% increase compared with last year, which is consistent to the growth of profit to shareholders, now including the impact of the VUSA divestiture. Capital expenditure. Capital expenditure incurred during the period decreased 72% to HKD 197 million. Now, the drop in capital expenditure was because we completed the Wuhan plant construction in the year before. We also completed the Foshan plant production line the year before. As far as the capital expenditure for this year, it was mainly invested in some production line in the plant in Wuhan and also some upgrade of machinery in Hong Kong and mainland China. The financial position of the group remains strong. As at 31st of March 2017, our cash and bank deposits increased more than triple to 853 million. The increase was mainly due to cash received from the VUSA divestiture. Most of which will be reinvested to development of the group's core operating markets. Now, in terms of borrowing, our borrowings reduced by 40% to HKD 209 million, as the various capital expenditure projects were completed during last year. We started to repay borrowings using internally generated cash. Gearing ratio. As such, the gearing ratio of the group decreased to 8% at the end of the year from 16% to 8%. ROCE, return on capital employed. The group's return on capital employed increased to 39% as at 31st of March 2017, due to the one-off gain from the VUSA divestiture, and also employment of capital efficiently to generate higher shareholder value. 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 market review and talk about the outlook of the group's business. Thank you. Good afternoon again to all of you, and welcome. Let me share with you the top-line review of our business overall and by unit. At the end, I will also update you, like every year, on our sustainability performance. In November, we expressed strong confidence in our performance in the second half of the fiscal year. As we said then, we have indeed had strong second half sales. Net of VUSA divestiture, our net sales revenue grew +10%. As a result of growing sales faster than the first half, our total fiscal year top-line growth, net of VUSA divestiture, achieved +6%, and our operating profit was up +3%. Our operating profit grew slower than revenue as we deliberately invested into building our brand equities and our geographical expansion. These investments are important to secure our long-term position and will continue in FY 2017-18. On our sustainability targets, we have met our KPIs on both portfolio evolution and environment. In the new FY 2017-2018, we will continue to invest to grow our brand equities. This will be accentuated by commodity costs, which are now turning from favorable to unfavorable, with some raw material prices increasing. Our investment will also go into supporting our international expansion with our new entry into the Philippines market. Overall, by geography, we registered strong growth, strong top-line growth in Mainland China and Australia, New Zealand. Whilst Mainland China growth was reduced when reported in Hong Kong dollars due to currency depreciation, our biggest geography delivered yet another strong top line at +17% in renminbi. On Hong Kong, as we have now grouped our U.S. beverage business into the Hong Kong segment, after the U.S. tofu business divestiture, total Hong Kong operation fiscal year sales were +5% versus +3% in the first half. Net of the U.S. divestiture, Hong Kong improved its performance in the second half after we started a bit more slowly in the first and ended flat in revenue and profit. Australia continued very strong momentum with double-digit growth in the top line, and Singapore was down -5%, as we adjusted trade inventories in the conversion to our new distributor for our imported beverages business. As a result of all this, Mainland China has now become 49% of our total group revenues, followed by Hong Kong, which still represents 40%, and Australia and New Zealand at 9%. What this means is that our biggest market is also our fastest-growing one. Let me therefore start the geographical review with Mainland China. Mainland China grew sales +17% and operating profit by 19% in renminbi. We were cycling very high growth last year. Last year, the numbers were +29% and +46%, respectively. This level of growth has been compatible with keeping our trade inventories at a normal level. Operating profit growth has been driven primarily by favorable raw materials. Our go deep efforts continue to drive our brands in the areas where we are strong. Our go wide push keeps expanding Vitasoy in new markets and in new channels. Also, we have started to develop programs to increase our share of key occasions with a strong activation of Chinese New Year in 2017. For the new FY 2017-2018, we will put stronger A&P investment into our brand equities, and we intend to drive our existing portfolio via a proven model in the most effective and consistent way possible. First of all, we will drive more aggressively the Vitasoy classic brand equity above the line. The feedback of the various execution of our Stand By Me mainstream campaign that we aired in FY 2016-2017 has been very positive. We will continue to air this campaign in a new adjusted version that captures the visuals and occasion that resonated the most with the shoppers in China. I would like to show you the commercial that we are going to use in this fiscal year, please. All right, secondly, in-store activities have always been, and will stay critical in our business model, so we will continue to invest in this area. The last point for this new fiscal year is we are raising our investment behind digital media activities. Here I would like to show you as an example, this video, which is an example of a creative, engaging way to connect Vitasoy to the breakfast occasion. This video is using a character that is famous in the south of China called McDull. I hear that a lot of you have enjoyed it. Linking Vitasoy with breakfast and doing it through different camera angles and different activities, very important. Let us now review the progress in our home base, Hong Kong. Hong Kong performed more strongly the second half of last fiscal year than in the first. Counting the post-divestiture remaining business in U.S. Our revenue in total was up 5%. Operating profit was flat due to the underperformance in the first half. As Vitasoy Black, that we launched last year, has established itself, we have just introduced an additional low sugar variant to address the part of our user base, which is most interested in this benefit. I would like to show you the commercial for this. As well as our low sugar innovation effort, we have also continued to stay focused on growing our main franchise, Vitasoy, as you can see from the in-store material, just a thought over there. Importantly, we also relaunched our kids pack. In Hong Kong, we tend to have many more SKUs and elements in the portfolio. With a new low sugar formula that is appealing to moms, and also with new character graphics, which are appealing to children. We would like to show you the online communication for this particular launch. Okay. We would like now to move forward and to also use this opportunity to announce some exciting innovation on our high nutrition tier on Vitasoy Calci-Plus, for FY 2017-2018. You will recall that in last fiscal year, we relaunched Calci-Plus, and at the same time, we folded it under the Vitasoy brand name by adding the Vitasoy brand name on the packaging. This has generated incremental growth as it satisfies the additional health benefit requirements of our shoppers. We are now very excited to announce more innovation on Vitasoy Calci-Plus for next year in three new variants: almond milk, coconut milk, and a new soy milk with cholesterol-reducing plant sterol. Almond milk and coconut milk represent the first-ever launch of plant milk in Hong Kong. We know that shoppers want a more plant-based choice and healthier options, but at the same time, they also want good taste and indulgence. These two formulae provide the high calcium, low sugar, and low cholesterol benefit of Vitasoy Calci-Plus in formulae which are entirely almond and coconut based respectively. I would like now to show you the commercial that is going to bring this to the attention of the shoppers in Hong Kong. We are very excited about this, because a bit of a first in Hong Kong. We have brought the products, and so they are there in the refrigerators. You are encouraged to try them and tell all your friends how great they are. Mm-hmm. As for the new Vitasoy with plant sterol, just a couple of words on it. This new formula is proven in local clinical tests to actively reduce cholesterol by up to 10% after three weeks of use. Very simply, one pack a day will be enough to achieve these results after three weeks. We believe that this is an exciting new product for shoppers who are interested in sustainable, healthy, and tasty plant-based nutrition. We feel we have a good platform for this new fiscal year to grow our Hong Kong business. Let me now move to our overseas businesses, and I'd like to start from Australia and New Zealand. Australia and New Zealand delivered a very strong year because revenue grew by 10%, OP grew 1% in local currency, and they became +12% and +4% respectively when reported in HKD. What were the key drivers of this result? First of all, a strong core business. The team has improved in-store execution, the promotional strategy, and its distribution and activation across channels. You will also recall that last year we introduced a new Vitasoy called Protein Plus, an unsweetened, high in protein kind of formula, and this launch has also added incremental revenue to our business. Second, the continuous growth of our recently introduced Vitasoy Almond. This new offering has helped us to extend our number one market share leadership in the overall plant milk category in Australia, and has recently also delivered us the number one position on total plant milk category in New Zealand as well. Thirdly, we achieved improved results in the chilled section of the store, now growing faster than the ambient one. To keep our momentum in 2017-2018, we will continue to drive all the above. Let me now close the by geography review by briefly covering our Singapore business. Whilst our Singapore business was down in sales due to the transition to a new imported beverage distributor, our Singapore business continues to strengthen its number one tofu share leadership and deliver a satisfactory bottom line. On tofu, we have grown our business by 1%, by developing both the Vitasoy and the Unicurd brands, and also adding a new egg tofu to the Vitasoy platform. On the imported beverages business, the Singapore team assessed that to improve our future execution, we needed a new distributor. We have now changed our distributor, and as you do before doing so, we have decreased our export shipments to bring down the trade inventories in Singapore. After having completed this transition during this year, we will over time, be in a stronger position to drive our combined solid and liquid Singapore business to a new level. Now, before moving to the yearly sustainability update, and also a final recap, I just wanted to share with you some exciting news, that in the next fiscal year, we will add a new important and promising geography to the Vitasoy universe with the launch of Vitasoy in the Philippines. We have announced on the 16th of February, that Vitasoy has signed a joint venture agreement with Universal Robina Corporation of the Philippines. Through this joint venture, Vitasoy aims to explore further the plant milk potential in the Philippines, addressing consumer wellbeing and sustainable nutritional needs in that country. We are absolutely delighted of this partnership and to be working with URC. These are two successful Asian family companies collaborating to enhance consumer wellbeing. We do not plan to cover more in this particular meeting today. I can tell you that we have just started selling the products to the trade in the Philippines, and that we will update you further during our November mid-year announcement. After having reviewed the business results, let me now review briefly with you our progress on sustainability. You will remember that 2 years ago, we published our first ever environmental, social, and governance report, ESG, where we described our company purpose, our sustainability model, and our approach overall. Last year, we issued our second ESG report. We called it 2.0 because like software, we are expecting that this is going to be an ever-upgrading itself kind of journey. This ESG 2.0 report not only updated on the previous year's situation, but actually initiated three key actions. One is that we re-articulated our sustainable plant-based nutrition vision. Number two is that we chose key areas of action. Specifically, we chose product portfolio and environment as the area of sustainability action for the company. Then number three, we set KPIs and a specific year-on-year glide path for these KPIs to their achievement up until year 2025, so a 10-year glide path. In July 2017, i.e., next month, we will publish our third yearly sustainability report. In this report, we share the progress we have made in FY 2016-2017, in the fiscal year that just ended, toward the sustainability goals we announced with the second report. These goals are expressed in two main sections: making the right products, i.e., improving the sustainability of our product portfolio, and making products the right way, which deals with improvement in our operations. So on portfolio, our goal is to enhance nutrition, reduce sugar, and reduce fat content in our portfolio of brands that we're selling. Packaging material is also one of the portfolio KPIs where we plan to accelerate our efforts. We are sharing in this table some of the numbers, and all this will be included in the full report for your review. Basically, the baseline, our progress 2016-2017, and the 2025-2026 goal. The overall message is that we're on track with our KPIs, improving nutrition, reducing fat and sugar. As far as the environmental operations, this is the second area of our effort, and it deals with manufacturing, workplace, operation, and community. Here is a table showing you how we have progressed in FY 2016-2017 versus the baseline and the long-term goal in 2025-2026. Now, we stay very committed to keep accelerating our competence and also our impact in this area. This is not only for compliance, but rather because we see this as an integral part in our plant-based sustainable nutrition corporate positioning. We would encourage all of you to read the report, which will be accessible on our website, www.vitasoy.com, as of July 14. Now to close the whole session, like every time, I just wanted to have a brief recap of our Vitasoy growth model. We normally say at this point that we believe we're benefiting from market tailwinds. What this means to us is that the consumer retail overall trend in the marketplace is in our favor for quality, premium, healthy products, and sustainable products. We believe that as a company, we have developed over time significant strengths in brand equity, in a commitment to quality in our operation, in our products. We have now achieved a certain amount of physical infrastructure with our operation, our sales force, and we have very competent people whose capacity and capability we're leveraging to basically achieve sustainable growth year after year. The vector of our growth are three. One is executing better in the areas where we are already present, with the product we're already selling, executing them better. We believe that this can generate further growth. Expansion primarily means to us continuing to expand our portfolio into channels, into geographies. Innovation stands for product innovation, primarily. We believe that with these three vectors, we'll be in a good position to secure our long-term success. We stay determined to continue scaling up our business, growing our market shares in the core cluster where we compete, and we're also determined to invest in our brands and geographical expansion so we can protect our long-term position. Thank you for your attention, and this ends my presentation. Thank you.