Earnings Call: H2 2015

Jun 25, 2015

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy annual results briefing for the fiscal year 2014 and 2015. Before we start, we would like to introduce you to the senior management of Vitasoy Group today. Sitting in the middle of the head table, we have Mr. Winston Lo, Executive Chairman of Vitasoy Group. Hi. 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 Ms. Kitty Fung, our Chief Financial Officer. In the following presentation, we will first have Kitty to provide us with a review of the company's financial performance, followed by Roberto's presentation on the company's operation in different markets and the outlook. We will then have a 15-minute Q&A session. Now, let's invite Kitty to present to us. Kitty, please. Thank you, Angela. Good afternoon, ladies and gentlemen. Welcome to our annual results announcement briefing. Before we start our presentation, I would like you to draw your attention to this disclaimer regarding the forward-looking statements in this presentation. In the fiscal year 2014-15, we recorded a very strong performance, with encouraging growth in both top line and bottom line. The group recorded a net sales growth of 12%, with gross profit increased 15% and profit attributable to shareholders up 21%. The growth comes from our core categories, both soy and tea, as well as our two core markets, Mainland China and Hong Kong. Through continuous product innovation and improved execution in distribution channels, we are able to drive up top-line growth year-on-year. We also managed our operating costs prudently, continued to improve our product mix and manufacturing efficiency to deliver profitable bottom-line performance. For net sales, the group recorded an increase of 12% to HKD 5.1 billion during the year. It is also ahead of the growth of 11% last year. All operations recorded solid sales growth, particularly from Mainland China and Hong Kong. Let's look at net sales by geography. You can see that our Mainland China business has grown from 34% to 38% of the group's total turnover. China and Hong Kong combined already accounted for almost 80% of the group's total revenue. For the rest of the overseas markets, their absolute sales dollars have been maintained, but now they account for about 20% of the group's total. Driven by the solid sales growth, gross profit for the year increased 15% to HKD 2.5 billion. Our gross profit margin has also improved by 2 percentage points to 50%, mainly attributed to the improved manufacturing efficiency with increased volume, better and profitable sales mix, as well as lower commodity costs for milk powder, sugar, and packaging materials. EBITDA has increased by 11% to HKD 725 million. The higher gross profit contribution was partly offset by the increased marketing investment and volume-driven commission, as well as higher operating costs in staff costs, transportation, and warehousing expenses. Due to the moderate growth in depreciation and amortization charges, coupled with a reduction in finance costs, profit before taxation improved by 15% to HKD 524 million. With the improved operating profit and streamlining of tax structure, profit attributable to equity shareholders was up 21% to HKD 372 million. As a result, basic earnings per share increased 20% to 35.9 cents. As the group would like to share the success of these strong performances with our shareholders, the board of directors has declared a final dividend of 21.2 cents per ordinary share. Together with the interim dividend of 3.2 cents that we have already paid, total dividend for the year will amount to 24.4 cents, representing a 21% increase consistent with the growth in profit attributable to shareholders. With the investment in the expansion of our production capacity, capital expenditure incurred during the year was HKD 530 million, doubled the level of last year. The investment in production capacity included the following: the acquisition of land for the new Wuhan plant, the installation of high-speed lines in the factories in mainland China and Hong Kong, addition of new packaging lines, upgrade of our existing production machineries, as well as enhancement of our sales equipment and infrastructure, particularly in mainland China. The financial position of the group remained solid. As at March 31, 2015, our cash on hand amounted to HKD 335 million, with bank borrowing and finance lease obligations totaled HKD 158 million. As the group has started to take up some borrowings to finance the capital investment, our net cash has dropped 9% to HKD 177 million versus a year ago. At the end of March 2015, the group's gearing ratio stood at 8%, as we have used our internally generated cash to fund the production capacity expansion and upgrade. During the fiscal year, we have embarked on the building of our fourth plant in Wuhan, China. We would expect that the gearing ratio will increase in the future months as the company starts to take on bank loans progressively. The group's return on capital employed for the year was 35%, and it has improved by two percentage points from last year's level. The increase in return on capital employed shows that we have been employing our capital efficiently and thus generating higher shareholder value. This ends the first section of the presentation. Now, I would like to invite Roberto to share with you the review and outlook of the various markets. Thank you. Thank you, Kitty. I'm taking control of the presentation, sorry, from here. Okay. 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 and by unit. Overall, our results are fully in line with our target. You will recall that in the first half, we were ahead of our target. We're in line with our target with the full year result. First point is that our core categories and our core markets are accelerating growth. In doing so, they are driving overall top-line growth faster. In the last fiscal year, our revenue grow 12% versus 11% of last year and 9% of the year before. This is the gradual acceleration that we talked in our previous conversations. Second, our growth model, focusing on the three vectors of growth, execution, expansion, and innovation, is delivering results. Third, and encouragingly, in this fiscal year, our profit is actually growing ahead of our faster top-line growth. Last and very importantly, as we accelerate growth, we're also enhancing our corporate positioning externally and internally. I will share more details about this progress later on in my presentation. Let us start the by-market review with our home, Hong Kong. In Hong Kong, we crossed the important threshold of HKD 2 billion in revenue this year, and this was due to a strong growth of 8% in sales, with operating profits plus 2% on a very high base. The key drivers of this performance is our disciplined execution, focusing also on driving a very strong base business. But in addition to the base business, our innovation that we launched in 2015 has also delivered incremental growth. Both the new Vitasoy PET packaging and our new Vita Hong Kong style milk tea have delivered extra growth for us. Going forward, we will stay focused on our growth strategy. The first, we have just started our new Vitasoy brand campaign. This comprises not just in-store activation, but a new Stand By Me communication campaign and also commercially innovative packaging promotion. We put the packaging there in the refrigerator, so you can see them. You will see that this promotion enables the Vitasoy shoppers to compose messages with letters and numbers at the back of the pack. I will now show you two pieces of communication. One is the new Stand By Me mainstream communication that has already started airing a month ago. After that, we will show you a short video which is showcasing the ability to compose meaningful messages to friends and family using the new Vitasoy back labels. So we can show the two pieces, please. You. You hold my hand. Stand by me. You always said. Stand by me The packaging promotion is generating a good amount of buzz. We see it from the social media. These are the sort of things you can do with it. So you are encouraged to take all the packs in the refrigerator, do your own message before you leave, and let your friends and family have it. Now, second, we will grow in Hong Kong the innovation that we launched in last fiscal year. Now, particular focus on the Hong Kong-style milk tea, which has already become the leader in its own segment and done very well last year. Building on that strong foundation we started last year, we launched two new items under our VITA Hong Kong Style umbrella. One is a stronger tea taste milk tea, and the second one is a totally new product, which is adding coffee to our milk tea base. Now, this is what is called yuenyeung in the traditional Hong Kong tea house. Our execution is, again, delivering on this Hong Kong-style idea. It is very local, via popular references executed in a way that we judge contemporary and witty. It is another great packaging, it is another great product, and we have a mainstream communication that is on air to drive it, which I would want to share with you. For all of us who were not born in Hong Kong and don't speak Cantonese, it might be tough, but locally it works. All right. Let me now move to Mainland China. Our Mainland China business reached a bit of a threshold by becoming almost the same size as our Hong Kong business, around HKD 2 billion. This has happened after a very strong year, where our sales grew 27%, and our operating profit grew by an even bigger 37%. The bigger profit growth is driven not only by a certain level of economies of scale, and also the fact that the innovation that we launched is premium price versus the base business, but also by non-recurring favorable commodity prices. Okay? It is important we make sure you understand this. As you know, we have three vectors of growth. One is what we call execution go deep. Our go deep efforts have increased volume per outlet in the areas where we are already competing. Our expansion, our go wide effort, is expanding Vitasoy in new markets and channel. Our innovation is also adding incremental growth. You will remember that in the last encounter we had in November, we presented to you a new premium price Vitasoy called Vitality. This we launched, and it made an impact, delivering extra volume for us. It is a great platform because the high protein, high calcium, low sugar, we believe is a sustainable long-term platform for us to have, given the consumer trend. Now, when we are looking at this fiscal year, what are the building blocks? We were definitely very intention to stay the course, because our strategy is working. We will continue to drive our core established portfolio. We will drive the new launched Vitasoy Vitality, and we will continue to grow trial of our brands in Mainland China. I would like to move to our overseas businesses now by starting with Australia and New Zealand. Also before getting to the results, emphasizing these markets are particularly important for us. We are the number one plant milk leader, so the leader in our space in Australia. Not just leading the soy segment, but leading rice, oat, and also the recently added coconut. We are in a market that is quite sophisticated, with a consumer base that is demanding and really understands the benefits of this product. What we find is that being in Australia is really helping us, not only in terms of business results, but actually evolving our portfolio, evolving our consumer understanding. What we learn is relevant not only for Australia, but actually for the rest of the markets in our group. Net sales wise and operating profit wise, Australia in local currency had a good year of 4% growth in revenue and 4% in operating profit, which however became a contraction when reported in HKD due to the unfavorable exchange rate with the Australian dollar. The team in Australia continued to execute very diligently in both the mainstream channel and the coffee channel, which is important for us. As I was mentioning earlier, we launched a whole new coconut line, unsweetened SKUs and original SKUs, which got very good consumer acceptance, propelling this SKU to leadership of this new segment that we have basically started in Australia. Looking forward, we will continue to drive our newly expanded offering because we're now competing in most of the plant milk segments. In addition to that, we are renewing our efforts to drive our Vitasoy brand equity. We are doing this not only via evolving some of our appearance. For example, what you see on your right over there is the new packaging that we have deployed in the chilled section of the supermarkets and hypermarket for our chilled Vitasoy. Also we have started a whole new brand communication on the brand, that is really meant to own the space of from Australian beans, natural soy milk. This communication is pretty self-explanatory, and it emphasizing our expertise, our being from Australia for Australians. We would like to show you the TVC that is being aired in Australia at the moment to support. For over 70 years at Vitasoy, we've taken nature's goodness and turned it into something even better. We make our Soy Milky range from Australian grown whole soybeans, with a delicious milky taste that's high in calcium and perfect with your breakfast. Vitasoy, the tasty way to start your day. Okay. After Australia and New Zealand, United States. Last year was a challenging year for us in the United States. We met in November, and so you remember from then that we started a bit slower than usual. As a result of that, the total year, our revenue growth was 2%, and we registered a small operating loss of 1 million HKD. The Asian business, which is one section of what we do in United States, was strong growth, but the mainstream business, the mainstream tofu business for the Western market started a bit more slowly, causing us a loss in the first half. In the second half, the Asian business stayed strong. The mainstream business stabilized. We had a second half which was profitable, but not profitable enough to completely offset the first half. As a result of that, we registered a small loss. However, we are encouraged by the progress that we've made over the last two months, and we're working with our U.S. team to keep improving performance. Improving performance primarily means going forward, improving profitability. On top of our internal manufacturing and logistic initiatives, we will use three main drivers to achieve this. One is continue our expansion in the Asian channel, improving our mainstream performance results, and also drive innovation. In November, we presented to you a new line that our Nasoya brand launched. It was a new tofu line. Differently from some of the other propositions we have in Australia, which are sold in a package containing water, and which therefore require opening, draining, and cooking. We launched a ready-to-eat season line, okay? Called Nasoya Baked. Okay? While it took us a bit longer to list with the customers, we're now seeing a very encouraging response from shoppers now that the line is in the stores. We launched the first two variants. One was a teriyaki sauce variant, another one is ginger. We're launching soon in July a new flavor, chipotle flavor, which is a topical flavor in the United States. We are quite confident this will help us to generate more sustainable revenue in the United States. Now, closing on the by market review with Singapore. In Singapore, we had a solid year. In local currency, we grew 4%. The operating performance, operating profit was 1% up, which then became a flat once we had the conversion of the exchange rate due to the Singapore dollar depreciation. The overall result was also affected by some reduction in our export business, which happens in export business, is not as stable. But the domestic performance was actually very strong, domestic performance in Singapore. This resulted in our being able to not only retain our number one market share of tofu that we achieved last year, but actually expand it and increase our share advantage versus the other places in Singapore. Now, we're benefiting from a strong base business with the brand Unicurd. But also in addition to that, you will remember in November we informed you that we launched a whole new VITASOY Premium Tofu. So now when we go to Singapore, there are two brands in two tiers, okay? Price premium tier and base tier. We are able to then offer a more segmented, differentiated proposition that is driving results, increasingly so as we establish Vitasoy premium. It is also a very important strategic step for us because by providing a Vitasoy-branded platform in Singapore, instead of relying on Unicurd as a brand name, we can more easily link with all the other efforts that the group has, and all the other product offerings that the group can leverage in Singapore that we couldn't do before. As we go forward in the rest of the year, we will continue to scale up our Vitasoy equity by driving our newly launched Vitasoy tofu, and also importantly, synergizing with Vitasoy liquid. In Singapore, we always had a business of our Hong Kong-produced beverages, which the Hong Kong team was exporting over there. So what has happened over the last few months is that whilst we keep exporting to Singapore, this liquid Vitasoy, we gave the leadership and the execution of that to Singapore itself, as opposed to leaving it with the Hong Kong team. This is because the Singapore, by having a team on the ground, they are going to be better able to connect the Vitasoy tofu chilled with the Vitasoy liquid ambient, and actually drive the equity and synergize between the two. So this is the plan that is going forward, we are very happy with, and I think this will accelerate brand equity recognition, trial, and adoption in Singapore. All right? Now, normally, our presentation ends here. But as I mentioned at the beginning, we have another section here, where we would like to share with you some work that we have done on enhancing our corporate positioning. The reason for this is that increasingly, shoppers, yourself, increasingly want. As you relate to our brands, you have an interest, and you want to know what is the company, which is the company behind the brands, what does the company stand for, how is the company different from some of the other players in the market, and what are we doing in addition to deliver results that fulfills our mission? So today, we would like to share briefly with you three important interventions that we made during the year, that we prepared during this year, both internally and externally, that we are about to launch. The first one is in the area of sustainability reporting. We call it here ESG, which stands for environmental, social, and governance. What you will see on your right in green is our first ever sustainability report, that is going to be published mid-July, together with what you see on the left, which is our normal annual results report. Now, we are doing this, and in doing this, we would like to emphasize a few things. Our company was founded 75 years ago, and the original mission was to provide plant-based tasty nutrition, thereby having an element of sustainability at the outset on our founder's, Dr. K.S. Lo's realization that the dairy-based nutrition model on which the Western world had developed might not necessarily be so implementable in the Asian markets due to climate, due to land, due to a number of reasons. That the solution, in his view, was soy, and he was calling soy the cow of China. Okay? The reason was that this was the way nutrition and protein had been provided to the population in China and in Asia for thousands of years. Therefore, while this is a sustainability report that formally documents the effort that we are doing, we are keen to emphasize that for us it is not a late addition to our model, but actually part of what the company has always been doing. We believe that the vision that at the founding of the company was there is very relevant to our future. You, like us, read the papers, are exposed to media, and it is becoming clear that with the population trends that we have going forward, the model that the Western world has used might not be necessarily sustainable. And we believe that then plant-based nutrition will become increasingly important, because in addition to the health or no cholesterol and some of these benefits, there is really a sustainable benefit in terms of lower need of land, lower need for water and irrigation, and emissions. So I think, we think we are in a good position to have this coming out, but also really linked with something that we as a company have been keen from the outset. The first ESG report that is published, that you will see emphasizing our mission, our model, and describes the area where we're operating. Then we look forward in the next version, which is going to be published next year, to also include specific long-term commitments, 10 years commitments, glide path, and KPIs integrated with the rest of our strategy. So this is the work that is happening on sustainability. The second part of the announcement of corporate positioning has to deal with our website. The website is important as a symbol or as a way for us to articulate in a clear way, in an easy to refer way, who we are and what we do. I would like today briefly to introduce our new corporate website. Why are we revamping or changing the corporate website? Well, there are a few reasons. We think that there was an opportunity with the one that we had before to have a stronger focus on the consumer and on the shopper, on population at large, as opposed to only investors. We also think that the website is going to be a good channel to enhance the understanding of our corporate mission. We have made sure that we are providing with this version useful information on our products, on our brands, on health and sustainability, so there is a new section that is going to be doing that on purpose, so people can refer to that for advice. Also, there was another element, which was having a tool that is optimized no matter which device you use to access it, because the website was originally done before the explosion of tablets and mobile phones. So we needed to basically reset it to make sure that now it can be used also easily. So, the way when you go on the website, you will see that there is going to be an interface that is going to be very visual. As we have been promoting taste and nutrition and plant-based food and beverages, we are emphasizing that. So in the opening website, you will see that you will have good nutrition, good taste, good for the world, as one of the possible ways to actually enter. You will see that by clicking on any of these, you will be able to get into the content. The other way to get into the content is going to be to click on the menu icon. By click on the menu item, anyone will see the structure of the website. The structure of the website, what it captures is, first of all, three key sections. What do we stand for? So you want to understand what the Vitasoy company stands for, you click there. Why are we different? What is it that, as there are some other companies operating in the space, differentiates us from some of the other entities, and our products. Our portfolio's evolved, and we made an effort here to capture it by market and by category in a way that is impactful and clear. We also have a section on health and nutrition, as I was hinting before, and a section about what's new. Everything in terms of new product, new campaigns, and anything that is relevant on newness is there, in addition to the other sections similar to what we already had. As we go into the section, in the what we stand for, we basically deliver our mission, our values, our history, telling how we evolved from the 1940s until now, until today. When we're going into the we are different section, we're showing our differentiation and our uniqueness by telling our quality story from sourcing the ingredients on how do we make what is good in nature even better, as it is delivered in form or ready-to-drink products and food. On the our product section, we are showcasing our variety of products in all the markets where we are competing in a way that is very easy to understand. The website is actually on now, okay? You want to access it now, you can do it now. It's actually active as of yesterday. We wanted to make sure that it was okay before today, so we did it yesterday. You can access it, and we encourage you to really experience it. I think there will all be the financial information, the company information, but actually a lot of the soul of the company is going to be translated in there. Now, last third intervention on the corporate positioning has to deal with an important initiative that we have deployed internally to our 6,000 associates in the company, and we've been calling this the Vitasoy Success Drivers. See these as being the sort of, some companies call them performance factors or what counts factors. To us, what this initiative does is documenting six specific behaviors that all the Vitasoy associates will nurture, so we can keep winning in the marketplace going forward. Okay? I'd like to introduce these factors to you. Going from the top left, I'll read them so you can, they're not entirely easy to see over there. We start from customer focus. One of the key performance, KPIs, of our employees has been, but is now documented as customer focus, i.e., everything starts by thinking what the consumer needs are, and starting from there. Second success driver, accountability. We capture here the thought of behavior and thinking and acting like an owner. We don't use employee much in our company. We use ownership, and we use associates, okay? That's the way we like to think about our group. Strategic agility is the third, so the ability to envision a leading growth. Quality orientation, superior service and product. Collaboration, working in partnership for better results. Lastly, in green with a bulb, light bulb, innovation, i.e., generating business building solutions. These six factors are going to be used as of this year to also evaluate the performance of everyone in the company. We are very serious about it, and we believe that together, these factors increasingly will make more and more Vitasoy. These were the three interventions on the corporate positioning, and now to close. I recap normally our growth model and the way we are approaching the market and what we do. We have been emphasizing over the last few meetings that we are in a favorable position in terms of market trend. Not just in Asia, but in the Western world, actually everywhere on the planet, there is obviously interest in products which are providing functional nutrition benefits, products which are natural, products which are natural, organic, traceable, plant-based, becoming more dominant. We believe we can benefit from that, and that's a great asset to be on trend. Now, what comes on top of being on trend are some strengths that we, as a company, believe we possess. We have strong brands. We have a commitment and a mindset of superior quality. We have strong infrastructures in the markets where we're operating, and we have very competent people in the company. We have been using these assets at the service of accelerating our core markets and accelerating our core categories. We've been talking with you about the fact that in doing that, we're using three growth vectors. Execution, which means primarily growing per capita consumption. Expansion, which mean expanding our distribution in geographies and in channel where we're not competing yet. Innovation, by which we mean product innovation and packaging innovation. We believe that with this approach, we'll be in a good position to secure long-term sustainable success. Obviously, we need to earn this every day. There is no guarantee, but we're very determined to continue on this journey. That's the end of our presentation. Thank you very much.