Earnings Call: H1 2018

Nov 28, 2017

Good afternoon, ladies and gentlemen. Thank you for joining today for Vitasoy Interim Results Briefing for FY 2017 and 2018. 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. Good afternoon. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Hello. On the left-hand side of Mr. Lo, we have Mr. Chris Lau, our Group Chief Financial Officer. In the following presentation, we'll have Chris to provide us a review on the company financial performance, followed by Roberto's presentations on the company's business review in different markets and the outlook. We'll then have a Q&A sessions. Now let's invite Chris to speak to us first. Chris. Thank you. Good afternoon, ladies and gentlemen. Welcome to our interim results announcement briefing. Before we start our presentation, I would like to draw your attention to this disclaimer regarding the forward-looking statements in this presentation. Let's look at the financial performance. In the first half of FY 2017-18, we recorded a rewarding performance with strong growth in top line. Going forward, I will talk about our performance, excluding the impact of North American divestiture to ensure an apple to apple comparison. Net sales increased by 23% to HKD 3.6 billion. Most ex operating entities registered positive sales increases in both volume and value, particularly in Mainland China. Gross profit increased by 20%, mainly driven by the strong sales performance. In terms of gross profit margin, it has slightly decreased to 53% due to increased commodity prices, particularly for milk powder, sugar, and partially net off by improved manufacturing efficiency. Profit before tax increased by 22%. The improvement was mainly due to increment in gross profit, partly offset by moderate growth in depreciation charges. EBITDA for the interim period was HKD 688 million, increased by 20%. The increase of EBITDA was mainly driven by higher gross profits. Profit to shareholders increased by 12%, mainly due to improvement in operating profit, partly net off by increase in income tax, mainly due to Mainland China. This performance was in line with our determination to deliver sustainable growth against the context of increasingly competitive market conditions. Next slide talks about the basic earnings per share. As a result, basic earnings per share dropped by 14% to HKD 0.377. However, if you exclude the impact of North American divestiture, basic earnings per share grew by 12%. Dividend. In view of the Group's solid underlying financial performance, the Board of Directors has declared an interim dividend of HKD 0.038 per ordinary share for the six months ended 30th September 2017. Let's talk a little bit about the capital expenditure. Capital expenditure incurred during the period increased 45% to HKD 168 million. The capital expenditure was mainly related to the acquisition of new production line and invested in the upgrade of existing production machinery in both Hong Kong and Mainland China. As far as the financial position is concerned, the financial position of the Group remains strong. As at 30th September 2017, our cash and bank deposits decreased slightly by 2% to HKD 837 million. Our borrowings reduced by 86% to HKD 29 million as various capital expenditure projects were completed, and we started to repay the borrowings using internally generated cash. Gearing ratio. As such, you can see the gearing ratio of the Group decreased to 1% at the end of September. Next thing is about the ROCE, return on capital employed. The Group's return on capital employed decreased to 24% as at 30th September 2017 due to the fact that a one-off gain from the U.S. divestiture was generated for the previous interim. This ends the first session 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, and good afternoon to all of you and welcome to the presentation. Let me share with you the top-line review of our business overall and by geography. In summary, our April-September growth has exceeded our expectations. Note, however, that in this semester we are cycling slow growth of the same period last year in Mainland China. Therefore, we expect a more moderate growth during this fiscal year's second half. Our first half sales grew +23%, net of the North American divestiture, and this is our best growth in the past 10 semesters. Mainland China has been the key driver at +39%, and as mentioned just now, we want to emphasize that China was cycling a semester of slower growth than usual last year. Specifically, in April-September 2016, we had only grown +7% versus same period in 2015. All the other markets have grown, albeit more moderately, ranging from 2% and 3% growth in Australia and Hong Kong, to +7% in Singapore. On the operating profit side, growth was +24%, holding pace with top-line growth. Whilst we had announced in June we did increase investments in all of our markets, better manufacturing capacity utilization enabled a better bottom-line result. Vitasoy Philippines have started selling. We give you a first overall update on this business later in this section. Going forward, we expect that China will deliver more moderate growth in the second half, because in the second half, the base of growth is higher. Last year, we grew 18% in the second half in China versus the previous year. Despite this, we will continue to similarly invest in the second half of this fiscal year. This is critical to build our brand equities and secure our long-term position. Overall, if we look at the growth by geography, all markets were up. China and Singapore growth was reduced when reported in HKD due to the currency depreciation, whilst in the case of Australia, it was increased as currency appreciated. Hong Kong was +3%, as we have included the imported beverage business of North America in this segment since last year. On the operating profit, China profit growth kept pace with revenue. Whilst in other markets, we contracted as we increased investments, particularly in advertising and promotion. As a result of all this, Mainland China now has become 62% of our group's revenues, followed by Hong Kong at 30%, and Australia and New Zealand at 7%. Profit-wise, the geographical balance is very similar due to Mainland China's strong bottom-line performance, as you can see from the slide here. Let us therefore start the segment review by focusing on Mainland China. Mainland China sales grew +41% in renminbi and operating profit by 42%, cycling last year's growth of 13% for both net sales and operating profit. This level of growth has been compatible with keeping our trade inventories at a normal level. Operating profit growth has been driven primarily by gross profit as a result of higher sales in the context of us being able to fully utilize our manufacturing capacity in this semester. We have been complementing our sales effort with new brand-building activities in marketing to build awareness, trial, and loyalty of the Vitasoy and the Vita brands. In addition to mainstream sales you have seen before, this has included new social media promotions linked to dining occasions and sponsorship of popular online programs. Our go deep efforts continue to drive our brands in the areas where we compete. In particular, South China and Guangdong Province performed particularly strong in this semester, driving a very meaningful chunk of the incremental growth. Our go wide push keeps expanding Vitasoy in new markets and channels, which have all performed ahead of our expectations. Finally, we have also registered a very favorable response to our Vita Tea activation during the summer, which has provided additional growth in all markets and a base for more potential growth in the future. Let me now move from Mainland China to Hong Kong. Hong Kong delivered moderate growth at +3%, with some decline in operating profit. This is because we have increased investment in our brands. We look at Hong Kong as a growth market despite its very high per capita development of our products, and we will continue to invest in brand building and infrastructure so we can grow faster over time. On Vitasoy, the growth is driven by our premium functional tier, Calci-Plus. Both the core soy-based platform and the new items that we launched in spring 2017, almond, coconut, and soy with plant sterol for active cholesterol reduction, they are all growing. On top of Vitasoy, Vita Tea has also grown versus last year, and the summer campaign that we deployed on lemon tea has generated a very strong response. During the first half, we have also broadened our activations to ensure our brands feature in more consumption occasions. You see an example here about a promotion that we did in the coffee channel. To further grow our business and market share, we will continue to increase investment in brand equity, sales activities, and also local manufacturing, logistics, and distribution infrastructure to set up a firm structural basis for sustaining performance over time. Let's now move to our overseas businesses, starting from Australia and New Zealand. We grew +6% in HKD in Australia and New Zealand, and +2% in local currency, while operating profit declined by two points in HKD and -5% in local currency behind increased investments. We are sustaining our plant milk leadership. We have a strong core business, and stay focused on improving its in-store execution, promotional strategy, and activation across all our channels. Our Vitasoy Almond platform continues to grow and scale up. Our increased investments are primarily in advertising and promotion, and we believe that such investments can lead us to a stronger competitive position going forward, so we will continue to do them. Let me now close the segmental review by covering our Southeast Asian markets, starting from Singapore. Our Singapore business continues to grow top line, and has delivered sales growth of +7% in local currency. We will continue to innovate in tofu to strengthen our number 1 market share position with both the Vitasoy and the Unicurd brands, and integrate execution with our growing imported beverage business. On the operating profit, similar to Hong Kong, we are making investments in both advertising, manufacturing infrastructure, and people, as we prepare to more aggressively scale up this business. We expect these investments to continue in the balance of the fiscal year going forward. Now, before our final recap and closing, I want to provide the first update of the Vitasoy launch in the Philippines. We announced in June that Vitasoy had signed a JV agreement with Universal Robina Corporation, and as a result of that, we are now selling Vitasoy in the Philippines. This 50/50 JV collaboration between Vitasoy and URC is effective. We've just started our communication program to raise awareness and trial of our brand, and we believe we have an exciting proposition in the Philippines, and we've actually brought the products for you here, and they are in the coolers over there, and we really encourage you to try them. These products are not the product we're selling in Hong Kong. These products are product which have been developed, starting from the need of the Filipino consumer, okay? Developing a proposition that can win in that particular country. Okay? So you're welcome to try them. We plan to update you in June about the initial market response in the next investors' meeting. Meanwhile, to start with, I would like to show you the mainstream communication that we have just launched, and this, in particular, is the full-length TV commercial that the Philippines have been using. If we can please play the TV commercial. You're big on what's real. Real emotions, real fun. Real moments. Introducing Vitasoy, the new healthy drink. Made from high quality, non-GMO real soybeans. It's cholesterol free and packed with protein. No wonder Vitasoy is the soy expert. Now that's the real deal. Vitasoy. Real soy, real good. With extra calcium in Vitasoy Plus 1 liter. We are pleased about the work that the team in the Philippines has done, and it's early days, but we're quite confident that this will meet some positive response going forward. In summary, our April-September growth has exceeded expectations. First half sales growing +23%, net of the North American divestiture. Mainland China has been the key driver, mainland China growing 39% versus previous year. All other markets units have been growing top line, albeit more moderately compared to mainland China. On the operating profit, the growth was +24%, again, thanks to mainland China primarily, keeping pace with top-line growth. We started the operation smoothly in the Philippines, and we have launched the brand in the Philippines. Going forward, we expect that China will deliver growth, a bit more moderate in the second half, because in the second half, we're going to be cycling a higher base of growth than last year. Despite this, we will continue to similarly invest in the second half of this fiscal year, as this is critical to build our brand equities and secure our long-term position. To close the whole session, like we do every time, I briefly recap our Vitasoy growth model. As you know, we always start from the bottom, saying that we believe our platforms are operating in markets which are benefiting from tailwinds, products which are high quality, premium, functional, nutritional, we believe, are products that are very well-positioned towards retailers and shoppers in the markets where we compete. We are able to leverage some of our company's strength in brand equity, in quality, in some of the critical infrastructure we've already built, and in competence in our people. We are quite mindful of continuing to build our team capacity and our team capability in order to deliver growth that is sustainable semester after semester. We are operating with a model that has three growth vectors: execution, which is improving our performance in the places and stores where we're already doing business. Expansion, which means expanding our propositions gradually in territories and channel that we believe have propensity for our platforms. Innovation, which is commercial and also product. We believe that by operating in this way, we can secure our long-term position. In doing so, we will continue to increase investments in brand equity, in infrastructure, and in management to secure the growth is sustainable and results into a business that is cohesive and very integrated across all our markets. I think that ends the presentation that we have for you. We will open up now for questions if you have any. Thank you very much. Thank you, Roberto.