Earnings Call: H2 2013

Jun 27, 2013

Good afternoon, ladies and gentlemen, and friends from the investment community. Welcome you all to our fiscal 2012 and 2013 annual results analyst briefing for Vitasoy International Holdings. Very glad to see you all. Some are old friends, and some are new ones. Shall I just begin by starting introducing our top management at the head table? Seated second to my right is our Executive Chairman, Winston Lo, of the Vitasoy Group. No need to clap. You mean applause. To Mr. Lo's right is Mr. Larry Eisentrager, whom you all have been very familiar, our incumbent Group Chief Executive Officer. To Larry's right is Mr. Roberto Guidetti, who is our Group Chief Executive Designate, to be coming on board officially after July 31st. Welcome. On my immediate right is Ms. Kitty Fung, who is our Group Senior Director, Finance and Administration, and many of you have been very familiar. Just before we start, I am sure many of you might have read from our announcement in March that Mr. Larry Eisentrager will be retiring from the position of the Group CEO by the end of July. After that, we will have Mr. Guidetti coming on board as our new Group Chief Executive Officer. Mr. Guidetti has an extensive experience and background in the food and FMCG sectors, both globally as well as in the Greater China region. We are very glad to have Mr. Guidetti coming on board very soon, and we will be bidding farewell to Mr. Eisentrager very soon. But very glad today we have both of them coming in and sharing some of the results and performance of the group. Like previously, we will have Ms. Kitty Fung first to review the financial performance, followed by Larry, who will walk you through each market in terms of the company's business operational review. Roberto will be talking you through on the outlook and strategy of the group's development. Without further ado, then follow on, we will have Q&A moderated by all of us. Without further ado, may I now pass the time to Ms. Fung. Thank you. Thanks. Okay. Thank you. Good afternoon. Good afternoon, ladies and gentlemen. Thank you for being with us today. Before we start our presentation, may I draw your attention to this disclaimer regarding the forward-looking statements in this presentation. Now, let me share with you our financial performance for the fiscal year 2012/13. During the year, we recorded solid growth in both sales and profit. Our turnover has increased 9% year-on-year to HKD 4.1 billion. The growth was broad-based across all operating markets in both volume and dollar value. The group's gross profit also increased by 9% to HKD 1.9 billion, in line with our sales growth. In spite of the rising commodity prices and labor costs, we maintained our gross margin at 47.5%, similar to last year's level, through product and price optimization, as well as improving our productivity and operational efficiency. Profit before taxation increased 4% year-on-year to HKD 426 million. The good sales and gross profit performance was partly offset by higher investment in brand promotion in Hong Kong and China to expand our distribution reach. Also, the full year impact of scaling up our growth capacity has reflected in higher operating and depreciation expenses in Foshan, Hong Kong, and Australia. In addition, there was higher finance costs associated with the higher borrowing level during the first half of the year. All these factors had impacted profit before taxation performance. EBITDA for the year was HKD 620 million, up 12% from previous year. Despite higher marketing investments as well as the full year impact of our Foshan operation, we managed to maintain EBITDA margin at last year's level of 15%. EBIT was HKD 445 million, an increase of 5% versus a year ago. Profit attributable to equity shareholders for the year was HKD 303 million, up 8%. The increase was mainly due to improvements in sales performance, operational efficiency, cost management, and reduced non-controlling interest for our PRC joint venture partner in southern China. Basic earnings per share amounted to HKD 0.296, an increase of 8% from last year. The Board of Directors has recommended a final dividend of HKD 0.166 per share. Combined with the interim dividend of HKD 0.032 already paid during the first half of the year, total full-year dividend is HKD 0.198 per share. This represents an increase of 8% in line with the growth in earnings. The board is also recommending to maintain the cash position for the company, and hence, no special dividend will be declared for the fiscal year 2012/13. Capital expenditure incurred in the year dropped by 69% to HKD 134 million due to the gradual completion of the various capital investment for the past three years. Depreciation and amortization charges for the year was HKD 176 million, up 35%. The increase was mainly due to the new depreciation charges for Foshan plant, the PET production line enhancement in Hong Kong, as well as our Australian plant expansion project. The group's financial position remains healthy. As at 31st of March 2013, cash amounted to HKD 223 million. The group has also reduced its borrowing by HKD 146 million over the year, as we continued to repay the bank loan through internally generated cash. Total borrowings, including obligation under the finance lease, has dropped to HKD 252 million, with a net borrowing balance of only HKD 29 million. Shareholders' equity increased to HKD 1.6 billion. The gearing ratio has also been reduced to 15% as we continued to use our internally generated cash to repay debt. Let's look at the group's turnover by operations. Our Mainland China business continued to grow and increased to 29% of the group's total turnover versus the 27% a year ago. Hong Kong and Macau remain as our major market, it accounted for 44% of the group's total turnover. For the rest of the operations, their share contribution of the group's turnover is more or less the same as prior year, with Australia and New Zealand accounting for 13%, North America 12%, and Singapore 2%. Let's look at the group's overall turnover by product category. You will see that soy milk remains as our flagship product, accounting for 49% of the total. Our second-best-selling product is ready-to-drink tea, representing 22% of total turnover. For the other product categories, they are relatively stable versus a year ago, and you can see the percentages in the graph here. I will end my presentation on financial performance here and would like to invite our incumbent group CEO, Mr. Larry Eisentrager, to walk you through each market. Thank you. Thank you, Kitty, and good afternoon, ladies and gentlemen. I hope you can hear me. I don't want to shout the house down. Let's begin the business review. Full year 2012/2013 has been a strong year for Vitasoy, while coping with challenging operating environments characterized by slowing economic growth and rising costs in labor and production. Our business growth was broad-based across all operating markets and categories. Once again, we did our job. We focused on enhanced product quality, building brand equity, and driving sales force effectiveness and improving manufacturing efficiency. We grew our leadership position, strengthened our core brands and distributor networks, and led category growth in markets in which we operate. We increased our investments in brand equity and distribution reach and sustained our gross margin at last year's level through operating efficiencies. Now let's look at the operating markets in detail. First, our core market, Hong Kong and Macau. Hong Kong and Macau recorded 7% net sales growth, which is faster than the industry average, and 1% increase in operating profit. Product and packaging innovation are crucial factors for the operation's sustainable growth. During the year, we developed 10 festive special pack design products, which were well received by consumers. We also enhanced our brand equity through stronger advertising efforts and trade promotions. Five impactful advertising and one print campaign were launched on our flagship products. The overall Vitasoy and Vita brand franchise continued to grow and reinforce our leadership position in the market. We launched four new PET products with full listing in all retail channels and invested more in the market development of this packaging format. Export sales grew 8% year-on-year. Excuse me. While Macau sales continued to deliver an outstanding growth of 12%. Vitaland Group achieved net sales growth of 4% to HKD 316 million, and an increase in the number of school tuckshops and was able to deliver a steady profit contribution to the group. Our growth in profit over the last year was impacted by increased brand investment and sales development costs. Now let's look at the China market. 2012 was a tough year in mainland China. Despite the slowing economic conditions, we recorded a double-digit growth in both top line and bottom line, with a robust 16% increase in net sales and an expected 37% increase in operating profit due to the full year operation of the Foshan plant compared to last year. Our new Foshan plant has been running smoothly in the first full year of operation. Its excellent location helped lower our transportation costs and allowed improved customer services. Gross margin was protected through improved sales mix and a balanced pricing strategy to counteract the rising costs. The additional capacity from the Foshan plant allowed us to develop markets outside Guangdong and to pursue our go deep and go wide strategy by deepening our penetration into existing cities and widening our territorial foothold. During the year, we continued large-scale marketing campaigns behind the Vitasoy brand to drive awareness. Now let's turn to Australia and New Zealand markets. The plant expansion project was completed successfully during the year. However, some operational difficulties took place during the transition period. As a result, net sales improved by only 3% year-on-year, affected by shortages and partially by adverse exchange rates. In the second half of the year, we recovered the lost sales by stepping up marketing and channel activities and regained category leadership. During the year, we have expanded our operation with our joint venture partner, Lion, to include New Zealand distribution. We improved our product offerings in the areas of cafe for baristas and also oat milk. Our launch of Vitago has been affected by headwinds created by significant added competition in the liquid breakfast segment. We are confident, however, that our dairy-free position will make a difference in this category. Turning to U.S.A., Vitasoy USA recorded net sales growth of 6%, with higher value items being the main driver. Recent launches of Nasoya Black Soybean Tofu+ into both mainstream and Asian channels, along with Pasta Zero low-calorie noodles, helped drive both category and brand sales. New product launches were supported by cost-effective social media campaigns to engage consumers and educate them about the health benefits of soy products. Vitasoy USA experienced manufacturing difficulties compounded by severe cold weather conditions, which interrupted supply during the peak season. The cost of rectifying these measures impacted the operating profit. By the year-end, the manufacturing capability of the plant has been significantly improved, with full market supply resumed. In Singapore, Unicurd recorded a strong top line and remarkable bottom line improvement. The net sales growth of 9% and operating profit of 39%. Through effective channel promotions, improvement in shelf merchandising, and consumer sampling activities, we have successfully expanded our market share and maintained our leadership position in the tofu category. Key accounts, restaurants, and export all recorded promising growth. During the period, we also implemented stringent cost management to achieve profitable growth. In conclusion, the group's performance for 2012-2013 was solid. The result is a credit to the enterprising and devoted Vitasoy team, who continued to go the extra mile for the highest standards of quality and execution. As this will be the last set of results I will present as the CEO of Vitasoy, I would like to say what a privilege it has been to lead this terrific company. It has been an honor working with my talented and industrious colleagues around the globe. The past five years has been noteworthy for the changes made in building and focusing the business while bringing to fruition a historic series of investments to accelerate our organic growth. I believe the solid and dependable profit growth of this company, despite considerable challenges over this period, exemplify our focus on investor returns for the long term. I would like to recognize the counsel, direction, and friendship afforded me by the Executive Chairman, Mr. Lo, and also the support of the whole Board of Directors during my tenure as Group CEO. Lastly, I'd like to introduce my successor, Mr. Roberto Guidetti. Close? Quite close. I'm learning to share the outlook and strategy of the Group with the following comments. During our handover period of three months, I've come to know Roberto as a fit, family-loving, talented Italian who, like me, is passionately attracted to what this business stands for and the sector within which it operates. Out of this combination will come tremendous opportunity and success, I have no doubt. Mr. Roberto Guidetti. Thank you. Ladies and gentlemen, good afternoon. I hope you can move smoothly from the Australian accent of Larry to the Italian accent of me. I wanted to start thanking Larry for the kind introduction just now, and also, most importantly, for your commitment and diligence during this smooth transition period. I've had many handovers in my career, but I can say this has been the most organized, thought through, and insightful. So thank you for that. Since I joined on April 1, we and Mr. Lo have together visited all our geographies around the world, understood our manufacturing processes, tried all our products and competitive products, listening to the insights of our local teams, customer shoppers, and also experienced our execution in hundreds of stores that we visited. The intention was not to ensure understanding, but actually to be able to generate new insights to move the business forward in the future. I want to thank you again and thank Mr. Lo for the consideration you both put into this process. Rest assured the team and I will make every minute we spend together count to sustain Vitasoy's success. Looking forward, we expect the coming year will be another challenging one because of the global financial trends, which are ever-evolving, the impact of inflationary pressure of commodity prices and labor costs. Yet our companies were poised to meet these challenges, satisfy the needs of our existing consumers, and continue to broaden our market presence. Our portfolio of brand equities that you see here perform in a market space of health and wellness that is ever more relevant and appealing to customers and shoppers in every single market where we operate. Our equities are at the core of our strong foundation, which comprises our commitment to product quality, holistic innovation, expanding infrastructure, and most importantly, the readiness and competence of our people. Now, I'd like to give a top-line outlook of our operating markets, starting from Hong Kong and Macau, where we expect concern over the economy, job security, and inflation will somehow continue to affect shoppers' consumption and purchase sentiment. Our internal operational challenges are inflationary pressure on production costs and a somewhat volatile labor market. However, encouragingly, Hong Kong is our most developed geography, where we continue to grow market share via growing our most complete portfolio of brand packages across different channels, consumer clusters, and all geographical areas. We are determined to sustain our winning performance in Hong Kong via reinforcing our superior portfolio offering, strong execution of our fundamentals, and relevant holistic innovation, not only marketing, but also concept, packaging, and product, supportive of our strength in distribution. As for mainland China, there is somehow a slowing economic environment, and as usual in China, very intense market competition that will bring some challenges to our operation. Vitasoy is extremely well-positioned to take advantage of shoppers' increased motivation towards healthy, nutritious, and tasty products for enjoyment in the different consumption occasions during the day. We will continue to grow our Vitasoy brand equity. We will continue our go deep, go wide growth strategy to drive increased per capita consumption where present, and expand our distribution through channels and geographies while continue to build capability and competence in our local teams to drive future growth. The primary focus is southern China, while in eastern China, we will continue to grow critical mass by reinforcing our brand strength over there. It is our goal to sustain profit margin through cautious pricing strategy and driving productivity in our processes. Australia, New Zealand, stronger competition in the alternative milk category, and an ever more assertive retail environment are expected as more well-known entities continue to enter our categories. Our innovative portfolio offering, superior distribution infrastructure of our joint venture with Lion, and the successful completion of our Wodonga plant expansion puts us into a very solid position to grow our business and keep expanding our category relevance and growth. We will continue to do so also through complementary occasion-based products like our barista line, which has been specifically designed to provide baristas in the coffee channel in Australia with the most tailored product partner to great coffee. We will continue to invest in consumer understanding and reflect that into relevant programs delivered via both traditional media and innovative social digital programs. In the U.S., the slow recovery of the economy will continue to affect consumers' purchasing power. We will continue to drive product innovation, strengthen manufacturing efficiency and capacity to counteract the rising cost in raw material and transportation, and leverage tailored consumer marketing. We expect a much normalized production to provide the basis for an improvement of our profit position in the coming year. Singapore, the operating environment in Singapore will remain challenging as labor supply continues to be tight and trading costs in the major chain store channel continue to be high. However, our tofu business over the years have shown the ability to deliver growth and increase stability, continuing to build on the equity strength and 34 years heritage of the Unicurd brand. Our focus will be on innovation, consumer trial activities to convert local high category consumption into our brands, with relentless focus on our executing with quality and executing with consistency. Meanwhile, we will continue our efforts in improving the overall plant efficiency and managing manufacturing costs to drive profitable growth. In conclusion, the fiscal year 2013 and 2014 is expected to be challenging. However, Vitasoy's existing market positions, a relevant portfolio which is on trend, branding, innovation, execution skills, and manufacturing competence put us into a solid position to successfully keep meeting these challenges. As we said at the beginning of this section, our on-trend portfolio brand equities appeal to customers and shoppers everywhere. Our equities are at the core of our strong foundation, comprising commitment to product quality, holistic innovation, expanded infrastructure, and readiness and competence of our people. We will continue our efforts in enhancing our operational efficiency and effectiveness, as well as adopting prudent cost management. This will enable us to both capitalize future growth opportunities and create sustainable shareholder value. Thank you.