Earnings Call: H1 2016

Nov 25, 2015

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy's interim results briefing for FY 2015 and 2016. Before we start, we would like to introduce you to 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. Good afternoon. On his right-hand side, we have Mr. Roberto Guidetti, our Group CEO. Good afternoon. Thank you. On the left-hand side of Mr. Lo, we have Ms. Kitty Fung, Group Chief Financial Officer. Good afternoon. In the following presentations, we will first have Kitty to provide us with a review on the company's financial performance, followed by Roberto's presentations on the company's operations in different markets and outlook. We will then have a Q&A session. Now let's invite Kitty to speak to her, please. Well, thanks, Angela. 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. In the first half of FY 2015-16, the Vitasoy Group continued to deliver growth ahead of our target in both sales and profit. Net sales recorded a strong increase of 14%, with gross profit grew by 18% and profit attributable to shareholder increased 40% compared to last interim period. This remarkable performance was a result of our accelerating our core model, which has been successfully driving faster growth in the group's core categories and geographies. Thus leading to the overall acceleration in both sales and profitability. On net sales, we recorded a strong growth of 14% to HKD 3.1 billion. All operating entities registered positive sales increase in both volume and value, particularly Mainland China, whose year-on-year growth was 32%. When we look at net sales composition by geography, you can see that our Mainland China business now becomes the biggest segment in this first half result, accounting for 49% of the pie. Its share of the group's total revenue has also grown from 42% to 49%. Hence, on a relative basis, Hong Kong's share of the pie reduced from 38% to 34%. You can also see that Hong Kong and China combined now accounted for 83% of the group's total revenue. Gross profit. In dollar term, it has increased by 18% to HKD 1.6 billion, driven by both sales growth and improvement in gross profit margin. In percentage term, our gross profit margin has improved from 50% to 51% in this interim period, mainly due to the enhanced manufacturing efficiency resulted from increased volume, as well as favorable commodity prices, particularly from milk powder, soybeans, packaging materials, and crude oil prices. EBITDA was HKD 529 million, up 28%, with EBITDA margin improved from 15% last year to 17% this interim period. The increase was mainly driven by higher gross profit, being partly offset by the increased marketing investment and higher operating costs in staff, sales commission, transportation, and warehousing costs. With the reduction in financing costs as a result of prudent cash flow management and only a mild increase in depreciation and amortization charges, profit before taxation improved by 35% to HKD 422 million. With the improvement in operating profit, coupled with the reduction in financing costs and minority interest charges, profit attributable to equity shareholders of the company increased to HKD 310 million, representing a robust increase of 40% compared to the last interim period. As a result, basic earnings per share increased 39% to 29.7 cents. As the group would like to share the success of this favorable business performance with our shareholders, the board of directors declared an interim dividend of 3.8 cents per ordinary share for the six months ended the 30th of September 2015. On capital expenditure, it has more than doubled during the period and increased to HKD 366 million. The CapEx spend in the first six months included the following. First, the construction cost and acquisition of machine for our new Wuhan plant. Second, the expansion of production capacity for our Foshan plant and installation of high-speed lines, addition of new packaging lines there, as well as the upgrade of existing production machinery in both Hong Kong and mainland China. The financial position of the group remained healthy and sound. As at the 30th of September 2015, we had a net cash balance of HKD 195 million, of which it included a restricted cash of HKD 221 million because of the dividend distribution, which has already been paid out on the 2nd of October 2015. Since we have started to take up additional borrowings to fund the various capital projects for capacity expansion and facility upgrade, the group's borrowings, including obligations under finance leases, has doubled, reaching HKD 336 million at interim closing. As a result, the gearing ratio of the group has also increased from 8% in the beginning of the year to 17% at interim closing, as we have progressively taken on more bank loans to finance our capital investment and expansion. The group's return on capital employed, ROCE, was at 23%, up three percentage point from the same period last year. The increase in ROCE indicates that the group is employing its capital efficiently, and hence, generating higher shareholder value. 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, Kitty, and good afternoon again to all of you, and welcome. Let me share with you the top-line review of our business in these first six months and our outlook by overall and by unit. Overall, our group results are ahead of our target, as Kitty mentioned. This is due to a uniquely positive combination of growth, which is accelerating, beverage seasonality, and favorable raw material costs, which are more than offsetting some negative currency impact in most of our markets. On a constant currency basis, our top-line growth is actually +17%, and the bottom line +38%. First, our core business in mainland China are accelerating growth, and in doing so, they are driving overall top-line growth faster. All markets are growing revenue on a constant currency basis. Second, our growth model, leveraging the three vectors of execution, expansion, and innovation, is delivering results. Third, encouragingly, again, in these first six months, our profit is actually growing ahead of our top-line growth, and the 34% operating profit growth is more than double our revenue growth, despite cycling strong growth in the first six months of last year at +16%. Beyond the contributing factors that I mentioned that we write here, what is driving this bottom-line performance is mainland China. In these six months, mainland China further volume growth has driven even higher the manufacturing capacity utilization of our sites, thus delivering full benefits of scale. Last was Vitasoy USA is becoming a smaller percentage of our group business. After the continued operating losses, we have concluded that we need a strategic reassessment for our operations over there, and I will cover this later on more in detail. Let us start by market review now with our home base, Hong Kong. In Hong Kong, we continue to grow despite its very high per capita consumption. In these first six months, we've grown top line by 4% and bottom line by an even higher 11%. The key drivers of our performance is our disciplined execution focused on driving a very strong base business. We also benefited from favorable raw materials and determined cost management that enabled a better P&L. Our innovation launch in 2014 has worked, and beyond the Yuenyeung style tea that you see in the slide here, our Vitasoy PET packaging and our Vita Hong Kong Style Milk Tea base line have also delivered incremental growth in their first year. Now looking forward, we will stay focused on our growth strategy. First, as we go towards winter, like every year, we will increase focus on our Vitasoy core proposition via more execution pressure and the renewal of our Warm Vitasoy program that is awaited every year by our Hong Kong fans. Second, we will continue to grow the innovation that we have just launched in this year and in the previous year. Third, we have a new exciting product initiative to present to all of you today, and it is called Vitasoy Go. This product opens a whole new Vitasoy platform in the consumer space that is uniting healthy nutrition and convenience. The product delivers a nutritious, healthy snack in liquid form. I will show you the communication that has already started airing, and after that, we will recap a few of the characteristics of this product. If we can show the advertising, please. Vitasoy Go. Let's go. Everybody, here we go. Let's go, let's go. Here we go. I saw some of you took some of the samples from the refrigerators. Please take them all. They do not need to. Take them all, give them to your friends, try it. We think the product is a breakthrough. It is a nutritious, healthy snack in liquid form. In the advertising, we are basically communicating the concept that it is the ideal snack mid-morning, mid-afternoon. What it has is that it has the same equivalent of protein of one egg. It has healthy grains, no cholesterol, no trans fats, okay? We are aware that it is a bit of a unique kind of product. You will find that because of the protein content, it is a bit thicker, okay? It will require a bit of education, a bit of communication. We are confident that this is the right product for us to go forward in addition to the rest of the Vitasoy line. Again, you saw the TVC, but there is obviously a plan that goes beyond the TVC that is driving the awareness and the trial over the next few months. Okay? Let me now move to Mainland China. Our Mainland China business had a very strong start in revenue, as Kitty mentioned, +32%. This 33% is cycling similar strong growth rate last year, same point in time was 35%. Last year we did 35%. This year, same point in time, we are adding as at +32%. On the profit side, growth has been quite remarkable at 70%, 7-0, operating profit, cycling the high 34% growth of last year. Our team is focused on the strategy that we have, i.e., there is an element of go deep, i.e., via our execution, increase the volume per outlets in the areas where we are already competing. Our go wide strategy or strategy vector is expansion, okay? Expanding into new markets, expanding into new channels. In these 6 months, as mentioned earlier, on top of the favorable raw materials, we actually benefited from better manufacturing capacity utilization because of the strong volume growth. Looking forward, we intend to stay the course because we look at our strategy, our execution, we think it is working. So we will continue to drive our core base, Vitasoy portfolio, and also we will continue to drive our newest premium tier, okay? Premium tier of Vitasoy that we launched last year. In addition to those, we do also have some news for Mainland China as well on our tea portfolio. You are aware that last year in Hong Kong, we launched the milk tea, the Vita Hong Kong Style Milk Tea. After the success, we have researched its appeal in Mainland China. Given the encouraging response from shoppers over there, we are introducing the Vita Hong Kong Style line in Mainland China. In doing that, we have evolved a bit of the packaging. We have evolved the graphic and the presentation to really convey even more strongly the sort of Hong Kong tea style, Hong Kong tea house kind of heritage. We also developed a communication and a campaign that sets the standard of performance by comparing our product to freshly brewed milk tea, okay? You see it is quite a witty execution, and we would like to show it to you now. Hmm. Vita Hong Kong Milk Tea. The feeling is right. [Foreign language]. So you can either go to the tea house, or you can just give a milk tea, okay? That is it. That resolve the issue and make the boss happy. Yeah. That is basically the idea. Let me now close the review of our Asian market with Singapore. In Singapore, we grew the business by 23%, but I need to specify here that this includes the business of imported beverages that our Singapore team has taken over from Hong Kong. You might recall that last time we announced that we are giving the responsibility of managing this import business, coming from Hong Kong into Singapore, to the Singaporean team, because we believe that now they can actually do an even stronger job on the execution, and integration with the solid tofu business that we have in Singapore. So on an apple-to-apple basis, our tofu business, so the tofu business part, has grown 5% in Singapore dollar term. Once we take the total business, you see that in local currency, there has been a bit of depreciation of the Singaporean dollar. The top and bottom line growth was 35% and 27% as a total business on local currency. How do we do this? We continue to drive our number one market share leadership position, even stronger than we achieved last year, increasing the share advantage versus the other players in the market. The combination of the base brand performance, we have a base brand there called Unicurd, that is performing strongly, and the new Vitasoy premium organic tofu that we launched earlier on over the last two months, is now offering shoppers a more sophisticated portfolio, segmented by product and segmented by price. The new Vitasoy premium tofu is also a very important strategic step, because it provides a Vitasoy-branded platform on our cold chilled tofu business that can synergize with the Vitasoy soy milk business. Before not having Vitasoy in tofu, we couldn't synergize as well with the liquid business. It's much easier now to drive the Vitasoy equity accordingly. Going forward, therefore, the priority for our Singapore subsidiary is to scale up our Vitasoy equity. We will do this by accelerating Vitasoy premium tofu growth, and also we have started to more overtly leverage Vitasoy liquid business premium image in Singapore by executing joint activities across the Vitasoy elements of the portfolio, both in solid tofu and liquid business. This we believe will accelerate Vitasoy brand equity recognition, trial and adoption. I'd like now to move to our overseas businesses, starting from Australia and New Zealand. The Australian, New Zealand markets are quite important to us. We have been talking about them, and we've been receiving some questions from you. We are now the leader of not only soy in the soy segment in Australia, but also rice, oat, and also most recently coconut. Competing with us are a few other very strong companies, whose action have created a quite a sophisticated, discerning and demanding shopper. We believe that beyond the business growth, we have a lot of learnings that we are gathering in Australia that can actually help us beyond Australia. That's why it's important for us to be there and to continue to perform. In terms of performance in these six months, Australia and New Zealand registered a growth of 4% in local currency, and a slight reduction in operating profit by -4%, as we have increased investment in innovation. However, most of you are probably aware about the Australian dollar trend. Once we translate this local currency into HKD, this becomes a contraction, and so the top line is a -17, the bottom line is a -23 due to currency. But on a constant currency, we have seen some modest growth. These results are driven by two main efforts. One is we have a whole new campaign and activation on our core soy business. You will recall that six months ago when we met, we presented this campaign to you. This has gone on air and driving basically the core soy milky part of our portfolio. We have invested advertising behind it. Hence the reason for the bottom line, a bit of a contraction on the bottom line. We also relaunched our chilled business, the refrigerated business, behind a completely new packaging and a new plan. As you can see over there. Now, going forward for the rest of 2015, 2016, we have also some exciting news on the product innovation front, because you can see basically every market has had a meaningful initiative this year. The initiative for Australia is a brand new Vitasoy almond milk. It is sold in two SKUs. I mean, you see one here, you see the unsweetened one, but we have an unsweetened and an original. It is a very important launch for us because it completes our presence in all the segments that exist. The almond segment over time has grown to become 30% of the total plant milk segment in Australia, and we were not present there. Okay? So we were market leader without being in almond. Now we launched it, okay, and we are starting to compete in there. The product tastes great, and the reason for the great taste is the same reason as is the main differentiation versus competition. Our product is not made from an oil, or from a flavor, or from a paste, but it is actually made from real almonds. So the almonds are Australian almonds, go to the factory, soak, grind, and produce the almond milk. That is the process. As a result, we believe that there is a product that is actually tasting better. Also it is a product that is really much in line with the positioning of the brand we have in Australia, which is strongly on sourced from Australia, sourced from local ingredients in Australia, like we do for soy milk. So we are supporting this launch with a brand-new communication that is focusing on our Vitasoy almonds originated from the Australian soil, and made even better via Vitasoy expertise. It is a campaign that is following the one that we had six months ago on the main brand, as you will see from the advertising that we are going to show to you now. At Vitasoy, we make our almond milk from Australian-grown whole almonds. With calcium for strong bones, it is perfect with your breakfast. Vitasoy, the tasty way to start your day. We expect that Vitasoy Almond will help us to further strengthen our leadership, and the product is already on the shelf. We expect that therefore now we are able to drive a new broad and complete portfolio, in all our customer segments. Now, let's now move to the last but not least market, North America. Our North American business continues to be a challenge. We keep growing top line, and in these first six months, we delivered a strong +4%. Okay? The top line is growing. But we have not been able to translate these extra sales into profitability. As such, our Vitasoy USA has registered a loss of HKD 12 million in the first six months. Now, on the revenue, Mainstream has accelerated, and added incremental business because we launched, at the beginning of the year, you might remember, this new product called Nasoya Baked Tofu. By removing water, and by seasoning the product, and creating a product that is basically ready to eat, this has registered a huge interest from shoppers. Because it is the first time that we make the tofu protein available conveniently, and with a taste that probably is a bit more familiar to the American consumer. So the reception has been excellent, and this has become incremental business for us and for the category. So the customers are very happy about it. However, we registered a higher loss on the P&L versus last year, primarily to manufacturing inefficiencies and personnel turnover of the plant. Now, you are aware, most of you who have been following us, that there is a bit of seasonality in our products. Historically, we tend to have a loss in the first half, and then to have to offset that or more than offset that in the second half because we have higher sales and a more profitable mix in the second half. But obviously, this six months higher loss will make the rebalance in the total year to profitability a bit harder. Now, our focus, therefore, going forward, is to improve the bottom line. On our top line, we will keep driving this Nasoya Baked new offering. We are adding to the two SKUs that we launched previously, a new one that has a very trendy flavor, chipotle flavor, for the U.S. now. We are very confident that this will drive additional revenue. On the bottom line, our focus is to support the team in resolving their internal manufacturing and personnel challenges. We have been to the market, and we have dispatched some of our people to the market to help them do this. On top of that though, as I mentioned at the beginning of my section, we will perform a thorough review of potential strategic options for the future for this market, because we are determined to achieve consistent and sustainable financial performance across all the units of the Vitasoy Group with no exception. Now, to close the whole session, like every time, I would like to recap our simple growth model. We start from the understanding that when we are looking at the market, when we look at the consumer, when we look at the retailer, we believe that these are favorable times for a company like ours, selling the product it is, and with the positioning that we have, because there is an interest for healthy, sustainable, high-quality products. We believe that as a company, as a group, we have strengths, core strengths in our brands, in our quality process, in our infrastructure, that now becomes stronger and stronger in terms of physical infrastructure, manufacturing, distribution, and also the capability and capacity of our associates. We are utilizing these assets to accelerate our core businesses, our core brands. This is basically the work over the last few years. We have really refocused in driving our core. The model that we have is a simple model of utilizing three vectors. Execution, which means driving higher per capita consumptions in the markets, in the stores where we are already available. Expansion, which means making the appropriate elements of our portfolio available in more markets and in more channels. Innovation, as you saw over the last couple of years, with no fail, every market will have one meaningful initiative on the core business to help them to accelerate the performance. We believe that if we continue to stay focused on this, we have a good platform to secure continued success of our group, and not only deliver sustained results, but actually deliver a business that is going to be a bit even more cohesive and even more integrated. That will be the end of my section. Thank you for your attention. Thank you.