Earnings Call: H2 2014

Jun 30, 2014

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy's annual results briefing for the fiscal year 2013 to 2014. 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 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, Chief Financial Officer. In the following presentation, we will first have Kitty to provide us with a review on the company's financial performance, followed by Roberto's presentation on the company's operations in different markets and outlook. We will then have a 15 minutes Q&A section. Now, let's invite Kitty to speak to us. Kitty, please. Thank you. Good afternoon, ladies and gentlemen. Welcome to our year-end announcement briefing. Before we start our presentation, I would like to draw your attention to this disclaimer regarding our forward-looking statements. Now, let me share with you about our financial performance for the fiscal year 2013/14. During the year, we accelerated our top-line performance through focusing on our core categories and enhanced channels. We achieved a broad-based growth with turnover increased 11% year on year to HKD 4.5 billion versus the HKD 4.1 billion last year. Driven by the overall sales growth and improved category mix, our gross profit increased 13% to HKD 2.2 billion. Despite the rise in the cost of labor and raw materials, especially the milk powder, we sustained our gross margin at 48% through the use of tactical pricing strategy and improved manufacturing efficiency. Profit before taxation increased 8% year on year to HKD 457 million due to higher sales, gross margin improvement, and lower finance cost, partly offset by higher marketing and operating expenses. EBITDA for the year was HKD 653 million, up 6% versus last year. Despite higher marketing and operating expenses, our EBITDA margin was maintained at 15%, same as last year's level. EBIT was HKD 467 million, up 6%. Profit attributable to shareholders increased 2% to HKD 307 million. This was a result of improved operating profit, but offset by the increase in income tax that's associated with higher earnings and one-off tax incentive benefits obtained in Australia and Singapore last year that were not repeated in the fiscal year 13/14. As a result, basic earnings per ordinary share were HKD 0.298. The board of directors has recommended a final dividend of HKD 0.17 per share. Combined with the interim dividend of HKD 0.032 that is already paid during the first half of the year, full year dividend is HKD 0.202 per share. During the year, capital expenditure incurred was HKD 258 million, mainly for several new and major projects, including the installation of high-speed machines to increase manufacturing efficiency in Hong Kong and mainland China, as well as the investment in sales infrastructure in mainland China. Depreciation and amortization charges for the year was HKD 186 million, up 6% with the completion of the key CapEx projects in the past several years. The group's financial position remains healthy. As at the 31st of March 2014, the group's cash amounted to HKD 321 million. With the improved cash flow generated internally, the group has reduced our loan level by half versus a year ago. The bank borrowings and finance lease obligations totaled HKD 126 million. As a result, the group has returned back to a net cash position of HKD 195 million as compared to the net borrowing positions for the past couple of years. Shareholder equity increased 8% to HKD 1.7 billion. The gearing ratio has further reduced back to 7% as we continued to pay down the bank loans through our internally generated cash. With this healthy cash position, we are ready for our next wave of investment and expansion. Now, let's look at the group's overall turnover composition across operations. Hong Kong remains our core market. Yet you can see that the contribution from our Mainland China business has grown gradually to 34% now, only behind Hong Kong. Looking at the turnover composition by product category, you will see that soy milk and ready-to-drink tea continued to be our key products, accounting for 48% of our total sales for soy milk and 22% for the tea category. For the other product categories, their shared composition remained relatively stable. This ends the first section of the presentation. 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. Thank you. Thank you, Kitty. Thank you, everyone, for joining us this afternoon. I would like to open here by sharing with you some of the business highlights of the last fiscal year. The main message really is '13-'14 was another year of consistent growth. Our top line, our revenue grew 11%, and this compares with 9% of the growth from the previous year. So some acceleration there. Importantly, the growth that we achieved was broad-based across categories and across geographies. You'll see later on that in Australia, due to currency, we have, when translated Hong Kong dollar, a negative, but in local currency, it was up. We basically have the whole business was up consistently. Mainland China, we continued a path, we call it, of gradual acceleration. An acceleration that is consistent with the capability and the reach that we have that is growing. Hong Kong and Australia are two very strong markets for us, so we focused on strengthening the core leadership position that we have in these two markets. North America and Singapore was another year of sustained growth. Most importantly, on the profit side, we restored profitability to North America, and we increased profitability in Singapore significantly. Last, what we did is that we also took some time to focus our investments on our core categories and also started developing plans that will be actualized into this fiscal year, '14-'15. I'd like to go into a review by market now, starting from our Hong Kong operation. Hong Kong had a strong year. Hong Kong grew 6% in revenue and 9% in profit. How did we do this? Obviously, we stayed very focused on strengthening the core of our business, Vitasoy and our tea business. In addition to having strong performance on our core, we also accelerated what we call our higher tier soy functional brands. Calci-Plus, which is our functional brand, delivered an accelerated growth. Sun Soi, which is the brand that we are selling in the chilled refrigerator section, became the number one soy milk in the refrigerator section in Hong Kong. We drove a very strong execution, and we also registered a strong performance from our Vitaland unit, which is a relatively significant part of our business. We are confident looking forward about our outlook. Where we are focused in terms of outlook is that we want to continue to strengthen our core categories. In addition to strengthen the core categories, therefore, we have been very active to develop innovation. Innovation is very important in our business, whether it is packaging innovation, product innovation, or commercial innovation. We were glad today to invite you here and to showcase a bit the news that are coming into the fiscal year now. You see the products that we put in the refrigerator and the display. Vitasoy is the first time Vitasoy is sold in a PET packaging. This packaging is very important because it is an on-the-go resealable pack that we have already piloted on our tea business, and we have big expectations about what it is going to do in the marketplace. Also what we have here is the new tea, okay, from the Vita Tea family. Just started shipping and just started airing. We hope that all of you will drink these products before leaving, and that you spread the word. Meanwhile, we also have a marketing campaign obviously behind this product. What we want to do today was to show you the Vita Milk Tea TV execution, okay? If you can please show it to everyone. It just started airing yesterday. Anyway, I think we look at this new category with a sense of confidence because, as you know, milk tea in Hong Kong is consumed in the tea houses. In China, milk tea is the most dynamic segment there is in the tea category, and we believe that we as a company are very well-positioned to present a product that is really Hong Kong-style, and therefore, deliver on expectation at the moment is now being met. We just started shipping, and it starts appearing in the store and being advertised now. We believe, during this fiscal year, we will have this innovation coming in to strengthen our performance. We continue to obviously drive a very strong execution in the stores and expand distribution. That is for Hong Kong. Moving on to Mainland China. Mainland China was a good year. We increased sales by 28%. Last year, same point in time, our sales had increased 19%. As I mentioned at the beginning, we are on a path of gradual acceleration of our Mainland China business. Our operating profit also grew 19%, and there are a few ingredients and a few things that we did to really drive this performance. First of all, on our main brand, we unified the Vitasoy program into a national program. Before, we had regional program, South and Eastern China. Now we have a national one. We relaunched the brand behind new packaging graphics, and in doing so, we actually harmonized the graphics with the Hong Kong graphics. Now the color is different, but actually, basically, we are on the same platform in terms of presentation to the consumer. We also developed a new communication campaign, which is emphasizing the product's functional benefit, because we believe whilst in Hong Kong, we are underlining the emotional elements of the brand. In China, the brand is not as well known yet, and so we believe it is very important for us to underline its functional characteristics. You might remember last time when we met together, we shared the advertising with you, so we will not show it again here. We also did work to activate our tea, our Vita Tea platform, with our flagship product, Vita Lemon Tea, and we discovered that the irreplaceable taste of Vita Lemon Tea has been very well-received from consumers in Mainland China, and this new line has become an additional revenue stream for us, way beyond the previous line, Guangdong Province. Obviously, we paid a lot of attention to execute impactfully, and also, we continue to progressively expand horizontally into Central, Eastern, and Southern China. Going forward, we are committed in China to sustain acceleration, and we look at China positively because we believe we have three vectors of growth in Mainland China. One is to continue to strengthen our execution because our per capita consumption in China is still much lower than we have in more established markets. We can continue to expand horizontally into new channels and new geographies. Also, we are getting ready to deploy in the Mainland China market, innovation that has been conceived, specifically thinking about the Mainland Chinese consumer, as opposed to also the Hong Kong innovation. So Hong Kong is a good generator of innovation for China, but it will not be the only driver of innovation for Mainland China going forward. Let me move to Australia and New Zealand. Australia and New Zealand performed strongly. In local currency, you see here that our top line grew 7% and our operating profit grew 9%. Now, you know that the Australian dollar weakened, and because of the Australian dollar weakening, when we translate from local currency into HKD, the numbers become minus 5 and minus 1. But obviously, we are looking at this, Forex goes up and goes down. What matters to us is the fact that operationally in the market, we are winning and we are growing. Importantly, in Australia, we started also with great attention and focus on the fundamentals. So we, during the year, we restaged the core part of our Vitasoy proposition, what we call our core organic range. I think you have been following us for a while, so you know that the brand is activated and positioned in Australia, is on a stronger functional communication compared to what we have in Hong Kong and China. Therefore, the communication that we have and the marketing that we have is a bit different. Today is a big opportunity for us to show you some of that. So like we have done for the milk tea, we have three of the Australian Vitasoy Australia TV execution that have gone on air. Before running them, let me just say a couple of words on them. Basically, our proposition in Australia, the differentiation point is, it is being sourced from Australian beans, from organic Australian beans, which are taken whole, put into our factory, grinded, and then produced and packaged. This is not the way our competition has approached this category. So we use that as a point of differentiation. Australian advertising has an element of engagement and humor to it. So you will see it is very different from what you have seen in Hong Kong. We can run the three. It is three short TVCs. Travel broadens the mind, but does it broaden the bean? Vitasoy soybeans are grown and packed in Australia. Others can come from thousands of miles away. A bit far-fetched, really. We use whole Australian soybeans to make Vitasoy. Some companies use processed soy isolate powder. Hmm. Powder, whole beans. Tough choice. At Vitasoy, we use whole soybeans grown in Australia, like this guy. Our farmers nurture, harvest, and deliver them to us. Each a perfect little miracle. Isn't he sweet? Okay, so that was our Australian organic core range that we executed in-store. A number of you are aware that in Australia, a significant part of our business is happening in the coffee channel. In the coffee shops, we are selling significant amount. We have a sub-line called Café for Baristas. It is a soy milk that is specifically designed to go together with coffee. So what we did in the last year is that we launched an organic extra variant that has helped us to keep growing the coffee channel business, which is very important for us. Lastly, in Australia, in addition to soy, we are active on other plant milk propositions, and primarily in oat and rice, which also register growth in addition to our soy platform. Looking forward, we are committed in Australia to innovate. Australia is a business that in a way has some similarities to the U.S. Plant milk is a very dynamic category, and we will have some innovation coming in this space very soon. We are committed to execute this with great discipline in the grocery channel and continuing to also drive growth in the coffee channel, as I said. Let me talk about North America. North America, we had sales at 6% growth, but importantly, with a number of you, I remember in the couple of previous engagements, there were questions about when do we get to profitability. So last year we got to profitability after 2 years of breakeven. It is not a huge profit, but it is profitable. How did we do that? Obviously, we focused on our fundamentals and we strengthen our leadership in tofu and Asian pasta. These are the two main categories on which we compete in the mainstream and natural channel, where all the U.S. citizenship goes to buy. We also took our upper-tier brand equity, Nasoya, and we took the upper-tier proposition of Nasoya, which is called Tofu Plus, and we restaged that. Importantly, in addition to the mainstream, also in the other channels, and in particular the Asian channel, we have done very well. The Asian channel is obviously an important business for us. We are importing products from Hong Kong, but we are not only selling products which are selling in Hong Kong. In the case here, you see there is a Black Sesame Vitasoy, but actually in Hong Kong, we have not yet marketed, but we are able to basically serve the needs of our U.S. business and have a proposition uniquely for them in this channel. Obviously, the restoration of profitability is also due to a lot of disciplined work and careful work on improving our manufacturing, our logistics, and our efficiency in the plant. Going forward, obviously, we are committed to increase our profitability. We are also committed to make sure that our full offering and our Vitasoy franchise in terms of awareness and in terms of visibility is enhanced, and is obviously particularly important for our U.S. business to launch new products, but to launch products which are really value-added. That is really the determination that we have. We compete in spaces that are premium spaces where there is a lot of consumer-retailer interest. Let me now close with the last market we have, Singapore. Singapore also had a good year. We grew in local currency by 5%, and then we actually accelerated operating profit three times as much, and we grew profitability by 18%. These numbers become 2% and 14% respectively when we convert into HKD. In Singapore, we actually benefit from having a tofu offering that is broader than our competitive set, and we are also starting to do work on innovation that is enabling us to build equity as an innovator, as opposed to just be recognized as a tofu player. This last year, we actually entered with a black tofu proposition, three SKUs. We are quite focused on executing and improving our presence and visibility in the stores. Like for the United States, there was a big effort from our Singaporean CEO, who actually sits in the audience over here, Mr. Dave Pak, to improve the profitability of the operation. Thanks to that, we had a good result. Anyway, in Singapore, the priority for us is to scale up the business. Obviously, it is not the biggest of our businesses. We believe it can be bigger. We need to scale up the business. How do we do that? Obviously, we can keep improving this core offering we have, but we also need to enable our Vitasoy franchise to be more visible, more recognized, and our plans, some of which will hit this fiscal year, 2014-2015, will secure that that happens. I would now move to the Okay, thank you for that. I would move to the last Wait. Oh, now we lost Okay. Let me see. Okay. That closes the by market review. Before we go to Q&A, I wanted to take time to do a bit of a closing and a few thoughts about going forward. We believe the categories in which we compete and the products and brands that we have are really benefiting from what we call market tailwinds. If you have a boat, the wind is coming from the back and pushing you forward. What we mean with this is that retailers and consumers, shoppers, show a high degree of interest towards our categories and products. So it is good for a company to be placed with favorable conditions in terms of marketplace. But uniquely to Vitasoy, we believe that we are consistently emphasizing four pillars of ours. One is superior brand equity. We believe that it is very important for us as part of our success model to really create brand equity. A commitment to outstanding quality of our products and of our operations. A commitment to also build local infrastructure. In our category, it is very important to have strong local infrastructure, both in manufacturing and in sales to win. Also passionate and competent people that are our associates and work with us every day. We paid an increased level of attention to what we call accelerating our core. So if you see some of the initiatives that we showcase with you today, they are all quite focused in terms of brand and category. The reason for that is that we believe by doing that, we have probably a higher chance of making a bigger impact because of superior competence, superior trade understanding, consumer understanding, and brand recognition. In terms of business vectors, I think we are in a good position because we can leverage both, actually execution. Execution is basically vertical growth in the same stores, i.e., increasing per capita consumptions of our products where we are already present. Expansion, which means expanding horizontally in new geographies. Then innovation. We believe that it is important that we have relevant innovation to come and give us a certain building block to secure sustained growth. By doing this, we are very confident that we are able to secure our long-term position. Our attention is on the short-term, but it is actually even more importantly on securing that we actually protect the success of our operations of our company in the long term. That would close my presentation.