Earnings Call: H2 2016

Jun 23, 2016

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy's annual results briefing for FY 2015 and 2016. Before we start, we 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. On Mr. Lo's 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 operation in different markets and the outlook. We will then have Q&A sessions. Before we start our presentations, may I invite Roberto to introduce us our new Group CFO. Roberto, please. Thank you. Good afternoon, and welcome to our full year announcement. I am delighted to introduce our new CFO, Mr. Chris Lau. Lau Kin-Shing? Yes. To all of you. Chris joined us in April this year after a successful multinational career that was spanning different businesses and financial assignments across different countries and categories. The handover with his predecessors has been very smooth. Over the last few months, we have already been working closely together, not only to sustain results, but actually on a number of projects to keep strengthening organizational capability and systems. Chris will now lead you through the financial review for last fiscal year. Over to you, Chris. Thank you, Roberto. 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. In the last fiscal year, 2015/2016, the Vitasoy Group continued to deliver profitable growth, driven by the acceleration of our core business. On Hong Kong dollar basis, the revenue recorded an increase of 10%. Gross profit grew by 13%, and profit attributable to equity shareholders increased 43%. Now, if excluding the effect of recognition of deferred tax asset and transaction costs related to the U.S. divestiture, the growth will become 24%. Thank you. The strong business performance was a result of our accelerating our core model, which has been successfully driving faster growth in the Group's core categories and geographies, and leading to an overall acceleration in both sales and profitability. Now, on a constant currency basis, the growth was higher with 13% growth in the group's top line, and 19% increase in the bottom line. The depreciation of renminbi, Australian dollar, and Sing dollar during the year have negatively impacted last year's result when reported in HKD. During the year, we focused on innovation in our core categories with new offerings. We also improved our execution in distribution channels and expanded our market share. All operations recorded a sales growth, particularly for mainland China. The revenue of the group increased to HKD 5.5 billion. Now, let's look at gross profit. Driven by the growth in revenue, the gross profit for the year increased 13% to HKD 2.8 billion. The gross profit margin has also improved by one percentage point to 51%, mainly due to improved manufacturing efficiency with an increased volume, better profitable sales mix, and non-recurring favorable commodity prices, particularly for milk powder, soybean, packaging materials, and crude oils. EBITDA. The EBITDA improved by 12% to HKD 812 million. If transaction costs related to the divestiture of the mainstream business in the U.S. were excluded, the EBITDA would have increased by 14%. The improvement was mainly driven by high gross profit, but was partly offset by increased marketing investment and volume-driven commission, as well as high operating costs in staff, transportation, and warehousing expenses. Now, let's move on to the profit before tax line. During the period, profit before taxation increased by 14% to HKD 599 million. It was mainly due to the moderate increase in depreciation and amortization charges, coupled with the reduction in finance costs. Net of the U.S. divestiture, the profit before taxation was HKD 615 million, representing a growth of 17% over the previous year. As such, the profit attributable to equity shareholders recorded a strong growth of 43% to HKD 531 million. It was because of the increased operating profit, lower net finance cost, reduction in minority interest charges, and decrease in income tax charges. If recognition of deferred tax asset and the transaction costs related to the U.S. divestiture were excluded, profit to equity shareholders would have increased by 24% to HKD 460 million. As a result, basic earnings per share grew by 42% to HKD 0.509, and increased by 23% if we exclude the recognition of deferred tax assets and the transaction costs related to the U.S. divestiture. Now let's look at dividend. As the group would like to share the success of the strong performance with our shareholders, the board of directors declare a final dividend of HKD 0.265 per ordinary share, with 25% growth compared to final dividend payment last year. Together with the interim dividend of HKD 0.038, we have declared the total dividend for the year amounted to HKD 0.303 with 24% increase, which is consistent with the growth in profitable attributable to shareholders, net of the recognition of deferred tax asset and the transaction costs related to the U.S. divestiture. Now let's look at CapEx. Now we continue to invest the expansion of production capacity, and the capital expenditure incurred during last fiscal year increased 35% to HKD 714 million. The CapEx spends mainly on the construction and acquisition of machinery for the new Wuhan plant in China, installation of high-speed lines and additional packaging lines in Foshan plant, the upgrade of existing production machinery in Hong Kong, Shenzhen and Shanghai plants, and investment in improving the production and wastewater treatment equipment in the North American operation. The financial position of the group remained very solid. As at March 31, 2016, our cash and bank deposits amounted to HKD 273 million. Since we have started to take up additional borrowings to finance the capital investment for expansion, the group's total borrowings have increased to HKD 350 million, resulting in a net borrowing position of HKD 77 million. Let's move on to the gearing ratio. The gearing ratio of the group has increased to 16% at the end of March 2016. As the group has progressively taken on more bank loans to fund its capital investment, we would expect the gearing ratio will increase in coming months. ROCE. The group's return on capital employed, ROCE, was 34% as at March 31, 2016, and 35% net of the U.S. divestiture. The consistent ROCE level indicates that the group is employing its capital efficiently and generating 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. Thank you, Chris. Good afternoon again to all of you, and welcome. Let me share with you the top-line review of our business last year and our outlook. Overall, our results continue to be in line with our target. We were ahead of target in the first half, you will remember. Our core business is accelerating our overall group growth, with all the geographies growing top-line in local currency. In doing so, our core business is driving our overall top-line growth faster. On a constant currency basis, our top-line growth last year was 13% versus 12% of the previous year, versus 11% of the previous year, versus 9% of the previous year. So 9, 11, 12, 13. This is the gradual acceleration we're committed to achieve in these three years that we communicated to you in previous meetings. Now, the profit side, the bottom line is actually growing faster than our faster top-line growth. Now, whilst we keep improving the efficiencies of our manufacturing and of our logistics, in the last fiscal year, we also benefit from some non-recurring elements in cost of goods due to favorable raw material prices and also particularly high utilization of our existing factories in both mainland China and Hong Kong before we open our new latest factory in Wuhan. Importantly, at the same time, we have successfully concluded three important infrastructure projects: the opening of the new Wuhan plant, the conversion of our China IT system to SAP, and also the divestiture of our mainstream assets in the U.S. We have also significantly enhanced our sustainability pillar, which is very important to us, with a sharper strategy and articulation of specific focus areas, glide path, and performance indicators for 2020, 2025 years. All these will provide our group with an even stronger platform to sustain the growth in the future. Going forward, we are deliberately shifting focus from what we call the gradual acceleration to more of a sustainable growth. This shift in focus forward is necessary for four main factors. First, we just made significant capital investments that now we want to recover. Second, when we are looking forward towards commodity and raw material trends, in the short term, still favorable, but over the next 12, 18 months onwards, we do not think the trend will be as favorable. Third, there is a somewhat deteriorating and more volatile market conditions in our core geographies of Hong Kong and mainland China. Last, competitive pressure is increasing in our categories, both on the innovation side, new entry side, and also pricing. So these are the factors that make this shift from the gradual acceleration over the last three years to a sustainable growth most appropriate. Obviously, I will say a bit more about what do we mean with sustainable growth towards the end of the presentation. Let me first cover the results of last year. As we mentioned, last year, we have registered broad-based growth. All of our geographies have grown in local currency. So you see in the slide each of the geography up, and you see that basically, mainland China was leading the growth with a 29% growth in renminbi. Due to this, when we are looking at the revenue by geography, mainland China is now 43% of our revenue and our biggest geography, followed by Hong Kong at 37%. Net of the U.S. divestiture, mainland China becomes 47% of our revenues, and Hong Kong 41%. So together, 88% of the group. Thus, we have not only a more profitable business, as you will see later when we will discuss the pre-post divestiture numbers, but also a more focused and concentrated business. As mainland China is now our biggest market, we will start our by geography review with it. Mainland China delivered a strong year. In renminbi, the team achieved a revenue growth of 29% in the year, and operating profit was an even bigger growth of 46%. Now, second half grew slower than the first half, reflecting seasonality and some softness in the overall market and retail conditions, which advised us to take a very proactive role in reducing trade inventories. Despite that, we still registered solid top line growth of 21% in the second half. Our go deep efforts have increased volume per outlet in the areas where we are already competing, and our go wide push is expanding Vitasoy in new markets and in new channels. The bigger profit growth is driven by cost of goods savings. These are not only due to improved manufacturing efficiencies, but as mentioned before, from some non-recurring favorable commodity prices and high capacity utilization in our factories. I will also say that in the second half, we have also accelerated some OPEX operational expense spending on advertising and people as we open our Wuhan factory. As I mentioned before, in the last year, we also completed successfully two very critical infrastructure projects. The first is that we opened our Wuhan factory, which is now fully operational in its phase 1. This enables us to better serve the communities of Hubei and Central China. Second, we have converted our previous different IT systems on our sites to a common SAP platform, which will be a major enabler of faster and more accurate decision-making and operational efficiency across all of our functions. These interventions provide mainland China with an updated, stronger business platform to sustain growth. As we look forward into 2016-2017, we plan to stay very focused on our fundamentals and driving our brand and manufacturing assets. On Vitasoy Classic, beyond driving execution and expansion, we are going to be driving brand equity. We have developed a new equity campaign for 2016-2017. You will recognize it as being the same campaign that Hong Kong is on, and this famous Stand By Me campaign, albeit with a different execution that is tailored to mainland China local usage occasions and local China relevant situations. I have one of the TV execution that we're going to use next year, and so I would like to show this execution to you now. 香港維他奶 That's the communication on Vitasoy Classic. Complementarily to this, we will continue to drive trial of our high nutrition tier, Vitasoy Health Plus, under a promise of plant-based protein nutrition with no cholesterol. Let us now review progress in our home base, Hong Kong. Hong Kong crossed the important threshold of HKD 2 billion in revenue last year. Topline growth was modest at +1%, whilst the operating profit grew +7% on what was a very high base. The key drivers of this performance is our disciplined execution, innovation, particularly the launch of the new Vitasoy Go, and like Mainland China, Hong Kong has benefited from now recurring favorable lower commodity costs and high-capacity utilization in our Tuen Mun factory. Going forward, we can certainly say that the macroeconomy and overall retail conditions in Hong Kong are showing signs of slowdown. We have a very developed business in Hong Kong, so it is critical that to grow this business, we continue to innovate to win. Therefore, as we start this new fiscal year, we have developed some very exciting new building blocks for 2016-2017. First, we have just launched our new Vitasoy Classic Black, and this is an exciting innovation on a classic platform because functionally, black soybeans and black sesame deliver nutrition and taste, and emotionally, this item has been designed to appeal to the younger set of our user base. The new campaign on air now shows how Vitasoy Black creates color and excitement, and I would like to show this new campaign to you now. 全新維他奶黑豆奶。此刻最精彩。 That is Vitasoy Classic Black. Now we have the refrigerators which are full of cold, enjoyable product that you can enjoy now and later, and really encourage you to try. These are great-tasting products. Second, we have started the process of moving our Calci-Plus brand under the Vitasoy brand name umbrella. We believe that this will enhance our Vitasoy equity nutrition credentials whilst enabling stronger marketing, commercial, and execution synergies. There is a communication that we have developed for this that I will now show you. It shows you the rebranding and also shows you the benefits of Vitasoy Calci-Plus, high calcium, no cholesterol. Can we please show the ad? 健康每個人都like。大豆高鈣健康飲品。維他奶Calci-寶。一包集齊身體最like的高鈣、零膽固醇、細糖。日日飲，健康日日like。維他奶Calci-寶。 All right. Then third, we have a third leg, which is the Vitasoy Go, and we have just introduced a new item on Vitasoy Go, and it is a third variant, dark chocolate. The taste of this product is fantastic. It will help us to continue to drive this innovative nutrition concept supported by a high protein, healthy grains, and no cholesterol. We also have a piece of communication that goes with this that we are going to show you now. 有啲餓，無時間？維他奶全新系列，Vitasoy Go，飲得到嘅小食。方便慳時間，頂肚啱啱好。含蛋白質，健康穀物，零膽固醇，零反式脂肪。Vitasoy Go，飲得到嘅小食。全新Vitasoy Go黑朱古力窩夫，頂肚餓。Keep going! In Hong Kong, a very strong innovation program, okay, for this year. Let us now move to our overseas businesses, starting from Australia and New Zealand. Australia and New Zealand had another year of growth, so in local currency, revenue grew 3% and profit grew 17%, but they became a contraction as we report in HKD due to the Australian dollar depreciation. We have and we stay focused in Australia on executing with diligence, and we will also drive our proposition in the chilled segment that we just launched in the first half of last year. In Australia, we are the plant milk category leader. We lead not just the soy segment, but we also lead in rice, oat and coconut, and we only have one segment that we did not have an offering, the almond segment. In the first half of last year, we launched an almond milk that we are now marketing, and we are determined to grow it strongly because almond is now, in the market, the second biggest plant milk segment. On Singapore, which is the other overseas location, we had a year where Singapore took over the beverage business from our export team in Hong Kong last year. This is the reason why the growth numbers show a very big increase, as we added a business that before was clustered under Hong Kong exports. Overall, Singapore had a solid year of 31% growth in local currency, with an operating performance growth of 43%, which became 23% and 38% once translated in Hong Kong dollars. Now, if we remove the imported beverages, our domestic existing Singapore tofu business grew single digit 1%. This resulted in making our tofu category leadership position even stronger. The combination of the Unicurd brand performance and the new Vitasoy Premium organic tofu that we launched is offering shoppers there a more sophisticated portfolio, but it is also helping us to link our tofu solid business with the liquid beverage business that now the Singaporean team is managing. Last but not least, let us now close the review of each geography with the United States. Our U.S.A. subsidiary last year again delivered strong top line of 6%, so revenue grew 6%, and market share growth in the tofu category. However, this was coupled with the inability to translate revenue into profits due to personnel and manufacturing gaps that we encountered. In this context, when we met in November last year, we announced a strategic review of this business, in November. The strategic review was pretty rapid, and it has resulted into a divestiture. We have divested our locally produced mainstream tofu business to Pulmuone of Korea for $50 million U.S. What do the selected assets comprise? On the brand side, what we sold is the Nasoya brand, the Azumaya brand. These brands were only sold in the United States, and they were only in the tofu category. We also sold San Sui brand for North America. San Sui is an organic fresh business. We have it in Hong Kong, but we have not sold the Hong Kong San Sui business. We have sold the San Sui business in North America, tofu. On the manufacturing side, the Ayer, that is the location where the manufacturing facility was, near Boston, Massachusetts, we sold the Ayer plant facility, and most of our employees in this facility have already transferred. The great majority of the employees have already transferred to the buyer. Therefore, as of this May 2016, our group does not have this business anymore, nor any production facility in North America. We will keep however exporting profitably our key Hong Kong produced brands to North America. So the liquid business, there is demand for it in the Asian communities on both coasts, and it is a profitable business for us, so we are going to continue to do that, but there is no manufacturing, and there is a very, very small team now that is left in the U.S. Now, we wanted to give you a perspective about how would the results of the last fiscal year look with the U.S. business or without the assets that we sold. In this slide here, there is a comparison of the Vitasoy Group P&L basics pre and post the U.S.A. divestiture. You basically see that we are losing around almost 500 million HKD in revenue, and the gross profit improves. From a gross profit of 51% that we saw before increase outline, without this part that we sold, the gross profit will be 54. This gives you an idea that this is a divestiture that is meaningful. Then you will see that on the profit for operations and operating profit percentage, we go from an 11%, including divested assets, to a 13%, excluding divested assets. Obviously, there is also a strategic role that this divestiture is playing, and we are able to now reorient our group attention and reorient our resources towards our core markets in Mainland China and Hong Kong, and making our business much more cohesive and concentrated. We want to take this opportunity to very sincerely thank our former employees in the United States for their contribution during all these years, and the professional commitment and determination displayed during the various phases of this transaction. We wish them and the remaining associate of Vitasoy USA the very best for the future with the new company. In closing, I would like now to reprise the theme shared at the beginning of the presentation of shifting from gradual acceleration to sustainable growth. What does that mean? What we mean by sustainable growth is not only our determination to pace our growth with market conditions and organizational capability so it is sustainable. That is one element of it. I will say something more at the end. Very importantly, sustainable growth for us also expresses our determination to ever stronger progress in growing sustainability pillar and provide a contribution to our external environment. In this context, we want to now look forward to our external environment and the role that we think Vitasoy as a group can play in this coming decade. If you read the news, the decade ahead is a promising decade for nutrition or nutrition-focused companies. In September 2015 of the United Nations Sustainable Development Summit, world leaders adopted the 2030 Agenda for Sustainable Development, which includes a set of 17 Sustainable Development Goals to end poverty, fight inequality and injustice, and tackle climate change by 2030. Then in April, United Nations General Assembly again proclaimed the United Nations Decade of Action on Nutrition, that will run for this year until 2025, and, this was judged a favorable step to increase focus on reducing hunger and improving nutrition around the world. These important global commitments make this coming decade a very promising one for nutrition and sustainability, and nutrition and sustainability are at the heart of our company purpose and what we do. The company was founded 76 years ago to provide affordable, sustainable nutrition on Dr. K.S. Lo's realization that the dairy-based nutrition model of the Western world might not be so favorable in the Asian context, in the context of different population and climate conditions, and that the potential solution on nutrition was soy, which was the cow of China, so to speak, and had been used to provide nutrition to this part of the world over thousands of years. In the company, over the years, we have added to this original intent, the determination to accelerate our core of plant-based product portfolio because this drives not only health, but also sustainability. We're fortunate that Dr. K.S. Lo's original vision and our company current positioning are very relevant to the future. Given the current population trends, plant-based nutrition will be important more and more, not only for health, but also due to its lower need for land, less need for irrigation, and also lower emissions. You will recall that a year ago, we published our first ever environmental, social, and governance report, ESG report. The first ESG report framed our company purpose, our sustainability model, and a description of our approach. Now we're publishing the second ESG report. We call it 2.0 because like a software, our concept is that it will be continuously improving and upgrading itself, and this ESG report 2.0 not only updates on last year, but initiates four key actions. One is that we articulate a specific vision for our sustainable plant-based nutrition. We choose specific areas of action, and we set clear performance indicator for this coming decade and a year-on-year improvement path on these indicators. We integrate sustainability as a core element of our overall corporate positioning. The report will be available on our website as of July 15. So you'll be able to download it from www.vitasoy.com and will be published on that date. But when you will open it up, after the chairman message, you will find there will be three main sections. The first section is going to be describing Vitasoy sustainability. So here is where we're putting our vision, the evolution of our sustainability framework, and how do we go from framework to action with goals and KPIs. Then the other two sections are about action. First section is making the right product. One of the commitments and one of the action areas is about portfolio development. So which kind of products is the company going to develop? So on top of achieving its business and financial goals, we're going to be able to achieve our sustainability goals. Okay? The area of action in this driver are enhancing nutrition, reducing sugar, and reducing fat. Okay? I'm oversimplifying. Obviously, these KPIs are much more detailed explained in the report, but this is basically in a nutshell, the areas of focus that we're choosing on portfolio development for the future. Then the report shows a second area, and the second area is about making the products in the right way. So not only making the right products, but in making them, we want to make them in the right way. This part shows what our commitments will be in the area of manufacturing, operations, workplace, community. Then we will announce our intention to also accelerate efforts in the area of packaging, which is a very important area going forward. We encourage all of you to read the report. Over the next three weeks, this will be published, and we believe we take this very seriously and not on a compliance level, but on a corporate positioning and structure mission level. Now to close, like every time, we recap our Vitasoy growth model. We are starting from the fact that although the retail environment is showing some sign of deterioration in both Hong Kong and in mainland China, we believe that when it comes down to consumer preference and retailer-supported brands, we still have a good measure of tailwind behind us, because health, convenience, and sustainability are more and more relevant. We believe we are also leveraging strength that the company has in clear brand equities, a commitment and proven performance on high-quality products, increasing broadened infrastructure, and people capability. We want to, in the future, over the next year, 18 months, two years, increase our focus on building the team's capacity and capability. Over the last three years, we added a significant amount of business to the group. It is not just a matter of being a bigger size, but it is the fact that the business is now more sophisticated, and it requires a level of capability to manage it that we need to nurture. Okay? We will be very focused on this. As I mentioned before, our focus is going to shift from continuous gradual acceleration more towards sustainable growth that we are going to be able to sustain, that is going to be right year after year, and also pacing with the market conditions and with our own capability. Growth it will be still. The vectors for growth don't change. We have been talking to you over the last few meetings about the vectors of growth being execution, which means for us increasing volume per outlet in the areas where we compete. Expansion, which means geographical expansion and the channel expansion. And innovation. As you saw today, we continue on a yearly basis to provide our markets with meaningful innovation on our core categories. We believe that by continuing to focus on these, we are able to continue to secure manageable and sustainable long-term success. That concludes the presentation. Thank you for your attention, and we are open to hear any questions or comments from you. Thank you.