Earnings Call: H1 2017

Nov 29, 2016

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy Interim Results Briefing for FY 2016 and 2017. 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. Hello. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Hello. Thank you. On the left-hand side of Mr. Lo, we have Mr. Chris Lau, Group Chief Financial Officer. Hi, good afternoon. In the following presentations, we will have Chris to provide us with a review on the company's financial performance, followed by Roberto's presentations on the company's operation in different markets and outlook. We will then have a Q&A session. Chris? Sorry. Okay. Yeah. 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 the disclaimer regarding the forward-looking statements in this presentation. This is a very special year for the company. In May, we divested our Mainstream and San Sui business in North America for a consideration of US$51.4 million, and we recorded a net gain of US$24.5 million. As a result of this divestiture, Vitasoy USA ceased to be a local manufacturing business, and the post-divestiture business now falls under our Hong Kong operation, focusing on driving sales growth of its business in beverage imported from Hong Kong. In the following presentation, I will be presenting some of the KPIs, such as net sales in two lines. One is for the total company, and the other is net of divestiture. This will ensure that we are comparing this year and last year's numbers on the same basis. During the first half of the financial year, the Vitasoy Group kept growing above market average, though at a slower pace, cycling the high growth of the same period last year. Due to the recent divestiture of the North American Mainstream and San Sui business, the group overall registered a net sales decrease of 3%. But excluding the impact of the North American divestiture, the group achieved a year-on-year sales increase of 3%. Profit attributable to equity shareholder increased by 48%. The significant increase was partly due to the net gain from the U.S. divestiture, most of which will be reinvested in the development of the group's core operating markets. Now, before the net gain on the U.S. divestiture, the underlying profit attributable to equity shareholders of the company grew 15%. That's due to enhanced manufacturing efficiency and careful cost management. This performance was in line with our determination to deliver sustainable growth against the context of deteriorating and increasingly volatile market conditions in our core markets, rising competitive pressure, and the significant capital investment made in past years. Now, let's move on to the next two slides. The next two slides show the impact of currency fluctuation to the financial. On a constant currency basis, net sales dropped by 1%, while profit attributable to shareholders increased to 52%. You can see from the slide, on an actual currency basis, net sales decreased by 3%, but on a constant currency basis, actually only decreased by 1%. The profit attributable to shareholders on an actual currency basis, +48% to +52% on a constant currency basis. Now, next slide. These slides show the impact of currency fluctuation to the company's financial, net of the U.S. divestiture. Net of the divestiture, the group achieved a year-on-year increase of 5% in the top line and 18% increase in the bottom line on a constant currency basis. So actual basis, top line, 3%, but on a constant currency basis, +5%. For the profit on an actual currency basis, +15%, but on a constant currency basis, increased by 18%. So let's move on to the P&L. Let's look at the net sales number. During the first half of the financial year, the group's net sales decreased 3% to HK$3 billion. That's due to the divestiture of the Mainstream business and San Sui business in North America. But excluding that impact of the divestiture, we actually achieved an increase of 3% against last year. Let's look at the gross profit. The gross profit for the interim period increased 1% to HK$1.6 billion. It was driven by an increase in sales and improvement in gross profit margin. If you look at the gross profit margin, it has actually improved by two percentage points from 51% to 53%. That's mostly due to improved manufacturing efficiency, resulting from increased volume, as well as non-recurring favorable commodity prices, particularly for milk powder, soybeans, packaging materials, and crude oils. Move down the P&L. Let's look at the EBITDA. EBITDA improved by 45% to HK$765 million. Before the net gain on the North American divestiture, EBITDA increased by 9%. The increase of EBITDA was mainly driven by higher gross profit, we just mentioned, and cost savings. Let's move on to down the bottom, down the P&L. Look at profit before tax. During the period, profit before tax improved by 54% to HK$648 million. Before the net gain on the North American divestiture, profit before tax improved by 9%. The improvement was due to basically two things: a reduction in net finance cost as a result of prudent cash flow management, in spite of moderate increase in depreciation and amortization charges. Move down to the profit to shareholders line. Profit attributable to equity shareholders recorded an increase of 48% to HK$460 million. Before the net gain on the North American divestiture, profit attributable to equity shareholder increased by 15%, mainly due to improvements in operating profit and reduction in net finance costs. Now, let's look at the basic earnings per share. I think we're doing very well as well. As a result, basic earnings per share grew 47% to HKD 0.438, and increased by 14% when excluding the net gain on the North American divestiture. Now, in view of the group's solid financial performance, the board of directors has declared an interim dividend of HKD 0.038 per ordinary share for the six months end, 30th September 2016. Now, let's look at capital expenditure. Capital expenditure, during the period, decreased 68% to HKD 116 million. Now, the significant drop in the capital expenditure was because we have just completed the Wuhan plant construction and also the addition of production line in our Foshan plant. The capital expenditure in first half of the financial year was mainly related to two things: The construction of our new plant in Wuhan, mainland China, as well as the upgrade of existing production machinery in both Hong Kong and mainland China. Let's look at our financial position. Now, our financial position of the group remains still very strong. As at 30th September 2016, our cash and bank deposit increased by 89% to HKD 516 million. The increase was mainly due to the cash received from the U.S. divestiture. If you look at our borrowings, our borrowings reduced by 23% to HKD 269 million as various capital expenditure projects were completed during the last year, and we started to repay the borrowings using internally generated cash. As such, the gearing ratio of the group decreased to 11% at the end of September. Let's look at the ROCE, return on capital employed. Now the group's return on capital employed increased to 28% as at 30th September 2016, due to the one-off gain from the U.S. divestiture and employment of capital efficiently to generate higher shareholder value. Now, 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. Thank you and good afternoon again to all of you, and welcome. I'll share with you the top-line review of our business in the first six months of the year, and also the outlook for the next six months overall and by unit. Three main messages to start with. The first one is, we've grown ahead of the market average in our categories. The second one is that this growth has happened cycling a very high growth rate of last year at the same point in time. Then third, we are confident about our sustaining growth in the second half of the fiscal year. To start with, net of U.S.A. divestiture, the 3% revenue and 8% operating profit growth versus last year is cycling the growth of the previous fiscal year same point in time. If you remember, last year in the first half, we grew 14% in revenue, and we grew 35% in profit. We were cycling these high numbers. Mainland China sustained to this growth at 13% in renminbi. While Hong Kong was affected by some manufacturing issues in the context of a very developed Vitasoy business and somewhat slower beverage market conditions in Hong Kong. Australia had an excellent semester. Australia further accelerated and entrenched our number one plant milk position. Singapore extended our leadership in tofu, whilst on the liquid imports, we have reduced distributor inventories in preparation of a change of distributor in Singapore. As Chris pointed out, the remaining North American business after the divestiture, because now it is basically an export business from Hong Kong, has been reclustered into the Hong Kong segment. Our infrastructure projects, you remember last time we talked about the Wuhan plant opening, we talked about the SAP conversion, have proceeded very smoothly and are being implemented. We've also benefited from non-recurring cost of goods savings as raw material prices have been largely favorable, and obviously, we've also utilized our assets effectively. Although, because we opened the Wuhan factory, on the overall capacity utilization, it has been a bit less than in the past because we have a new factory. We are confident, looking forward, that we will be able to sustain growth in the second half of the fiscal year. If you now look at the results by geography, you'll see here a comparison of our four main markets in HKD, but also local currency, showing you China +13%. I wanted to say a few things about Hong Kong. We mentioned the reclustering of the U.S. business under Hong Kong. You see the number here is +3% growth in HKD. If we removed the North American business addition, Hong Kong in these six months is negative. Hong Kong in these six months was negative -3% versus last year. We'll talk later on about why. The North American export business is now transitioning also to a new distributor, but we are very confident about that going forward. Singapore, the reason why Singapore is down is that similarly, on the liquid business that we are importing from Hong Kong, we are changing distributor. We drew down the inventory of the existing distributor in order to then have the new distributor starting. This is a bit of a highlight of the markets, and we mentioned Australia having had a very good semester. As a result of all this, when we're looking at the revenue pie of the group, you see that mainland China has gone from 49% of the business to 53%. Clearly, our biggest market and the fastest-growing. Hong Kong, 37%. North America has been reduced to zero. It is now inside the Hong Kong and Macau here. Australia, New Zealand, 8%, and Singapore, 2%. Let me go market by market now, and starting from mainland China. Mainland China grew sales 13% in renminbi, and it grew operating profit 13% in renminbi. We talked about last year group cycling big numbers. If you remember, last year, same point in time, China grew 34% in revenue and 72% in operating profit. We were going against a very, very, very high growth last year, and we've been able to deliver 13% on that. The level of growth that we have has been compatible with our maintaining inventories at the trade level within the normal range. That is something that is very, very important for us, and in a way, sometimes it tempers our growth ambition because we don't want to push and end up into a situation of unmanageable trade inventories. The operating profit growth has been driven primarily by the raw material being favorable. In this context, we continue our strategy. You've become familiar with it by now. Go deep is the idea about increasing same-store sales in the areas where we compete. Go wide is expanding Vitasoy into new markets. Obviously, with the opening of the Wuhan plant, you can expect us being a bit more aggressive in Central China, because that is where this new plant primarily serves in terms of geography. On the innovation side, we're being quite focused on driving this higher nutrition tier that we have with this platform called Health Plus over the last period in selected channels. When we're looking forward to the balance of the fiscal year, we will continue to build manufacturing and commercial infrastructure, but we're also quite keen to continue to build brand equity in China. You will remember that in our last session in June, we showed you a campaign that we started, and the campaign was based on the same thought of Stand By Me in Hong Kong, but it was an execution that was tailored to the China different uses, occasions, and situations. I wanted to show you now another execution of this campaign that we have been airing in China. It's an alternative execution. Both of them are running simultaneously, and so I think we'll play it for you, I believe, in Cantonese and then in Mandarin next. This is to show you the work that we are adding, and obviously, there is an intentionality of not only building equity but actually doing it in a way that is enabling us to integrate Hong Kong and mainland China going forward in terms of brand equity. On top of this, what we are doing is also learning how to expand our platform across pack formats. Obviously, PET, for example, is a very important pack in the ready-to-drink beverage industry, and we are able now to provide this in mainland China and to use this as an additional driver of our business. Also, in addition to pack formats, we are also selectively learning about new Vitasoy products, which are plant-based, obviously, but not soy-based. These new items are distributed selectively at present, and they include a coconut milk beverage. This is not soy milk flavored with coconut, but it's a coconut milk beverage. I want to show you as an example, the campaign that is bringing this to life for shoppers for this introductory commercial of coconut. Can we please play? Hong Kong Vitasoy. The market for non-soy, non-dairy platform is quite significant. As you know, we are competing in these categories in Australia very successfully. We are approaching these opportunities in China humbly with the spirit of learning because we know that when you are launching something new in a new market, then you need to iterate, to be able to progressively get really close to the best way to position it. But we are confident that over time, this will enable us to deliver extra growth. We have the products here in the room. In the coolers over there, you have all the variants, not only the coconut milk beverage, we have Vitasoy Almond Milky, we have mixed grains variants. So I encourage you to try, drink them, and distribute to all your friends and family. Okay? These are great products. Let me now move after mainland China to Hong Kong. In Hong Kong, I want to spend some time to really clarify for you, the difference between Hong Kong base and Hong Kong with the U.S. divestiture in it. So Hong Kong shows +3% in sales, -3% in operating profit as a reported segment result. However, net of the newly folded remnants of the USA, our Hong Kong performer will be -3% in revenue, -3% revenue, and then flat in profit, okay, for the last six months. Why did this happen? We had a difficult April-June quarter, okay? And primarily this was due to some manufacturing issues, which we now resolved, that really hindered our shipments. Okay? Not being able to ship some quantity of products, we missed some important promotional slots, and so we missed some revenue, okay, in the first quarter. We had a second quarter, which was a positive quarter, but not good enough to offset the first quarter. So as a result, the first six months, -3% in terms of revenue in Hong Kong, flat in profit. Now, in terms of what drove the performance, we had innovation helping us. And in particular, it was the new Vitasoy Classic Black that you remember we introduced to you in June. So the response from shoppers to this extension was very positive. In addition to Vitasoy Black, we also, if you recall, repositioned and relaunched Calci-Plus, folding Calci-Plus under the Vitasoy brand name, and this also generated growth. Now these innovation programs were complemented by the team continuing to execute diligently, particularly in the second quarter. And, obviously, like mainland China, we have been benefiting from some of the raw material costs. But on the other hand, because our Tuen Mun factory in Hong Kong was producing for China because we opened Wuhan, as Wuhan started, then Tuen Mun produced a bit less for China, and so we had a bit less volume coming out of the factory. So that was also a factor influencing the result. Now, going forward in the second half of the fiscal year, the way we're looking at the macroeconomy and the overall retail conditions, it seems to have been stabilized a bit, but stabilized on a sort of low single-digit kind of growth. And we have a very highly developed business. So what we think is important for us is to really execute with discipline this innovation that we launched in the first half. And we also want to, as we go towards somewhat colder weather, to reprise what we do every year, which is a hot serve program that we have for Vitasoy and for tea that can help us to sustain our growth during the colder months. Now, we also have another part of our portfolio. We don't talk every time of this part of our portfolio, but it's the more, if you like, indulgence part of our portfolio, and particularly our Hong Kong-style lineup that we introduced a year and a half ago. First, our Hong Kong-style milk tea has become the number one leader in this category in Hong Kong, and we have developed a new campaign to air this year to basically coupling the features of the product with some lovemarks of Hong Kongness, so to speak. We're going to be using this milk tea, and this line is particularly relevant for the winter months. We can first show this new campaign on milk tea, please. So that is the sort of reprised campaign for the milk tea. And secondly, we also added a new member to the line, and this new member of the line is a coffee, is a Hong Kong-style coffee, okay, with a bit of condensed milk. And we are quite excited by the initial response to this item. We also introduced this with a short-length film that we're going to show you now. So, that was Hong Kong. Let me now move to a very good performer from Australia and New Zealand. In our South Pacific markets, we had a very strong semester. Revenue up 11% and operating profit up 37% in local currency, becoming 12 and 39 respectively when reported in HKD. Now, what is driving this business? Our core business, the one that we had, our organic line, our Soy Milky line, is growing. So first of all, the core business is strong and growing. But in addition to that, you remember we introduced Vitasoy Almond Milky, and we were expecting this to be delivering incremental growth, and it is doing so. And in adding incremental growth is also extending our number one position in Australia and putting us in view of the New Zealand market leadership, where we're almost there, okay? Now, Australia and the category responds to health, nutrition, and product innovation. And so we have just launched an additional item in Australia, and this item is part of our organic range, and it's called Vitasoy Protein Plus. All right? This product has two appealing and relevant extra benefits. It combines more protein, it's a 4%+ protein content, with the absence of sugar. So it's an unsweetened product with very high protein content, which is, in our view, a fantastic beverage companion for the healthiest breakfast. So we are confident that this initiative will meet the consumer demand for this kind of product and complement all the other items that we're selling in Australia. So very confident about Australia going forward. Let me now close the by geography review by covering our Singapore business. Singapore, as you look from these numbers, was down in sales, by 12%, primarily due to a change in the liquid imports distributor. On the core business of tofu, we continue to do well by growing 5% and by extending our tofu share leadership, and this is why when you're looking at the bottom line, you see that despite the revenue shrinking, the bottom line has grown by 8%. It's basically because of the core business is growing. Let me tell you a bit more about what's happening on the liquid import. We decided a year ago to give the imported beverage business to our Singapore team to manage, instead of leaving it with our Hong Kong export team. The logic was that because the Singapore team is on the ground, they are closer to the execution, they're closer to the retailer, and they can do a better job at moving this business from a sort of trading business to a business where we can actually really do real execution and driving. All right? In doing so, for the first year, we've operated with the distributor who was already doing the business before. But during this year, we realized that if we're approaching this business with a mindset of accelerated growth, this was not the partner that would be able to get us there. So we've decided, and we've already changed the distributor. When you change distributor, what happens is you need to let your current distributor decrease inventory. So you need to arrest your shipments for a while, they decrease the inventory by selling it out, and then you restart again with a new distributor. So we started this in November, so this is not included in here because this is just the first 6 months. We're confident that this will enable us to get back there on the revenue, but most importantly, that we will have a much stronger partner with whom to build the liquid business, which obviously like in every market, the liquid business is much bigger than the tofu business. So the way for us to scale up Singapore is that in addition to tofu, we need to create scale in liquid. All right? So that's what happened over there, and that's why the results are what they are. Closing the session like every time and recapping a bit about our growth model. We have often used the language about tailwinds and referring to the market, and what this means is we believe that shoppers, consumers, retailers, keep expressing a preference for our products or portfolio of products, sustainable plant-based nutrition. We are very confident that this consumer preference for these kind of categories will continue. What we are bringing to this, in addition to the consumer trend, is actually very strong brands that we have built and we are building, a clear understanding and procedures on quality, on products. We are growing an already existing strong infrastructure, and obviously, we continue to strengthen the competence of our organization. We are quite mindful that if we want to deliver sustainable growth, as the business becomes bigger and in a way the model becomes a bit more sophisticated with more channels, more locations, and more platforms, we need to keep building the team's capacity and capability. That's an effort that we are very focused on at the moment, and we believe that our simple model of execution, expansion, innovation, grow same-store sales, expand in appropriate markets, and actually continue to innovate along our company mission, will be critical to really achieve long-term success. In doing so, we are very committed to make sure that we are integrating our business and we are creating more and more cohesive business. If you are looking at the kind of initiatives that will be launched, you will probably see that the direction is very consistent. Different starting points, but now very consistently forward. Again, to close it, given the way we ended the first half and the beginning of the second half, we are confident about our growth outlook for the second half of the fiscal year. Thank you for your attention. This was the end of my section. Thank you.