Earnings Call: H1 2015

Nov 26, 2014

Thank you for joining us today for Vitasoy interim results briefing for the fiscal year 2014 to 2015. 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 a review on the company's financial performance, followed by Roberto's presentation of 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 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 fiscal year 2014/15, we recorded a strong performance with good growth in both top line and bottom line. The group's net sales has increased 17%, with gross profit improved 21% and profit attributable to shareholders up 22%. The growth comes from our core categories, soy and tea, and our two core markets, China and Hong Kong. Besides strong sales and marketing assets to drive top-line growth, we continued to improve manufacturing efficiency and product mix, as well as carefully managed our operating costs to deliver profitable bottom-line performance. We recorded a strong net sales increase of 17%, from HKD 2.3 billion to HKD 2.7 billion for the first half, ahead of the growth in previous two years. All segments achieved solid sales growth, particularly for China and Hong Kong. If you look at net sales by geography, you can see that our mainland China business now accounts for 42% of the group's total turnover, already ahead of Hong Kong, which accounts for 38% of the pie. China and Hong Kong combined already made up more than 80% of the group's total revenue. On the other hand, if you look at net sales by product category, you will see that the soy category, which composed of soy milk and tofu, accounts for 51% of the total, with tea 31%. Therefore, the top two core categories, soy and tea, already made up more than 80% of the group's total turnover. The other product categories account for the balance, with their share composition staying relatively stable. Driven by the strong sales growth, gross profit increased 21%, from HKD 1.1 billion to HKD 1.35 billion. Gross profit margin has also improved by 1.5 percentage point to 50%, attributed to better and more profitable sales mix, improved manufacturing efficiency driven by volume, and lower commodity prices, particularly for milk powder, sugar, and paper, when compared to last interim period. EBITDA was HKD 412 million, up 13%, with EBITDA margin maintained at 15%. The higher gross profit was partly offset by increased marketing investment, higher operating costs in staff expenses, higher volume-driven commission, as well as the increase in transportation and warehousing costs that was associated with increased volume. Due to the moderate growth in depreciation and amortization charges, coupled with a reduction in finance costs, profit before taxation improved by 18% to HKD 313 million. With the improved operating profit and the benefit from the streamlining of tax structure, profit attributable to equity shareholders was up 22% year-on-year to HKD 222 million. As a result, basic earnings per ordinary share increased 21% to HKD 0.214. Since the group needs to conserve cash to fund our upcoming CapEx investment to support further business growth, the board of directors declared an interim dividend payment of HKD 0.032 per ordinary share, same as last interim period. During the first half, capital expenditure has increased by 93% to HKD 166 million, as we continued to expand our production capacity. This included the installation of high-speed lines in the factories in mainland China and Hong Kong, additional new packaging lines, upgrading of our existing production machineries, and additional sales equipment and infrastructure. The financial position of the group remained very solid. As at 30th of September 2014, we had cash amounted to HKD 336 million, with bank borrowing and finance lease obligations totaled HKD 157 million. As the group has started to take up additional borrowings to finance the upcoming capital investment for expansion, net cash dropped 8% to HKD 179 million versus the beginning of the year. The gearing ratio of 9% at the end of September was indeed lower than the 13% gearing ratio at last interim period. But it has slightly increased from the 7% in the beginning of the year, when the group started to take up additional borrowings to finance the planned capital investments. In order to secure adequate manufacturing capacity to support the business growth in mainland China, we have entered into a memorandum of understanding with the local government in Wuhan on the construction of our fourth plant in China this September. The new plant is scheduled to commence commercial production in 2016. As we plan for the second wave of expansion, we expect the gearing ratio will continue to go up. However, we will keep monitoring our self-generated cash flow and borrowing level to fund our working capital and investment needs, and to maintain a healthy financial position for the group. 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's business. Thank you. Thank you, Kitty, and good afternoon, ladies and gentlemen. I am delighted to go into more details about our performance and share some perspective about the outlook. Let me start from saying that these results in these six months are ahead of our target growth trajectory. When we met six months ago, we talked about being determined to achieve a gradual acceleration. This is not really gradual. It is stronger than that. At the same time, we are also recognizing that a number of things have gone all right. The business part has gone well. The commodity costs have gone well. The raw materials have gone well. So we are approaching these results with a sense of balance because this one, six months, where basically everything has sort of gone according to plan, and this is not necessarily happening every six months. Okay. When we are looking at the results as per our strategy, what is happening is that we are accelerating our core portfolio in our core geographies of Hong Kong and mainland China. What this is doing is that this is driving a faster overall growth for the group. In our core, okay, the growth is broad based across the geographies and across categories. Oops, I am sorry. Okay, here. What is important is that our bottom line is keeping pace with the top line, which is something that we are very committed to. Our focus on execution, on expansion, and also on innovation is delivering results. Our North American mainstream business in these six months has performed below expectation, okay? We will talk about it later on in the context of the whole group. Let me move to our first market and review it market by market. We start from our Hong Kong performance. Hong Kong did strongly. Hong Kong grew the top line 11% and grew the bottom line 5%. This compared with the growth of last year versus previous of 4% and 3% respectively. So in our main business, we stayed very focused on executing our core SKUs with diligence. Also, as every summer, we added a strong program on tea. Okay? Our product on tea behind the whole new Vita Lemon Tea campaign was also supported by a new TV communication. I would like to share this TV commercial with you that we aired during the summer. Hey, I want it, want it, want it every day. Hey, I want it, want it, want that album today. Perfect. I want it, want it, want it. I want to taste that candy. I want it, want it, want it. I really want that VLT. Hey, let's play to taste. A refreshing piece of TV commercial and restating and reconfirming the position of Vita Lemon Tea as the number one tea in Hong Kong. On top of this, obviously, you remember six months ago, we introduced to you innovation on both packaging and on total product. Specifically, we introduced to you the launch of the Vitasoy in PET packaging and our new whole Vita Milk Tea brand. We are pleased to report that both of these innovations have gone well and both of them are adding incremental business to our Vitasoy core business and to our tea business. What we want to do, in terms of outlook for the next six months in Hong Kong, is that it's important that we continue to drive disciplined execution of both the core business and the innovation. We are also, as we go towards winter, we are in a unique position where some of the SKUs in our portfolio lend themselves to be marketed hot, or warm, I should say. You are aware that every year we have a nice program on Vitasoy with Walmart in the store. We are always continuing that, but what we are doing this year is that we are adding Vita Milk Tea to the Vitasoy hot program. Okay? We have a couple of commercials here as well that we want to show you. We'll show you first the original hot Vitasoy, followed by the new, not yet aired, it will air on Friday, Vita Milk Tea. Yeah. Yeah. We think these are interesting because also what goes together with them is a collectible program of redeemable cups, okay, which are branded, okay, which encourage consumers to drink hot, but also are collectible, as I said. Lastly, for Hong Kong, we are continuing to expand also on our solid nutrition platform via launching a brand new tofu SKU. Okay? This is in the Sansui tofu line, and is an extra firm SKU. We're building on the success that we have on this variant in our Singapore business, and it's actually quite important for us to launch it because it fills a gap in our portfolio in terms of tofu texture. Okay, so this we just started, and you'll find it in the stores already now. Let me move to Mainland China. We are very encouraged by our performance in Mainland China. Mainland China, in the 6 months, grew the top line by 35%, and by the same amount, our operating profit grew 34%. This compares with growth rates of 21% and 20% last year, the same point in time. You will recall that last year, we restaged our Vitasoy core brand, and we also started intensifying the effort on our tea business. As we have done that, we continue to do that, and we continue our approach of go deep and go wide. Go deep, meaning in the geographies where we are already present, we are already available, driving per capita consumption of our core offering, while go wide, meaning geographical and channel expansion. This has been really the key driver of our growth over the last 6 months, and we have registered broad-based growth across all our channels and across all our packaging forms in Mainland China. On the basis of these results of the core business and our strongly leveraging go deep, go wide execution and expansion, we believe that now we are ready for adding this third vector of growth, which is innovation. And innovation, what we mean by innovation, we mean innovation specifically for the Mainland China market. We are very excited that we are in a situation where we can leverage our superior Vitasoy category expertise to tailor specifically to the Chinese shopper needs, a new product with a new product technology platform. And the combination of these is this new Vitasoy Vitality, Yi Huo in Chinese. We put it there in the coolers, so you are encouraged to try it, to drink it, and to enjoy it. Before explaining the key features of this new Vitasoy, we thought we would share with you, we bring it to life for you, by showing you the way consumers in China are going to experience it. We have a TV commercial that is going to, in 30 seconds, tell you what this is about. We can air it, we can show it to you here in Cantonese first, and then we have the Mandarin version also coming. New Vitasoy Vitality, Yi Huo, is designed to compete in the premium price segment in China. It offers, as you saw from the ad, extra vitality, and the support is a higher content of protein, a higher content of calcium. Reduction in sugar and no cholesterol. We think it is a very modern, contemporary proposition for the lifestyle and the growth of the market in China and beyond. It means that this proposition actually complements Vitasoy Classic. It is not replacing Vitasoy. We are going to be obviously operating with two-tier, going forward, and with Vitasoy Vitality, we are able to enter the fast-growing premium high-protein nutrition segment in China. Over the next 6 months, we will continue obviously on our core portfolio of Vitasoy Classic and our tea business, but we are devoting particular attention to drive this new Vitasoy Vitality. We just concluded a launch event in Guangzhou at the end of October. And after an encouraging response there from distributors, media, retailers, we are basically starting now the effort of trial and continuing the discipline in in-store execution. We are very keen in launching this product, that what we are going to be driving is the whole Vitasoy proposition, not just the new one. Okay? The idea about having a plan that is enabling to establish the new but drive the classic. We are going to do that. Let me now move to Australia and New Zealand. In Australia and New Zealand, we registered a modest growth in the top line, 1% in local currency, that when translated in HKD, because of Australian dollar depreciation, became minus 1%. But we had a good growth in the bottom line by 18%. Okay? The key drivers of this was that the two key premium profitable items in our portfolio did very well. In the last 6 months, we shared with you that we relaunched our core organic line, okay? We were able to relaunch that, execute that, advertise that, and that is growing. Also, our Café for Baristas proposition in the coffee channels also was up and growing. We continued, and the team continued, to stay very focused on executing the line. As we go forward, we are going to be in a very good platform in Australia because we will be able to drive a renewed, broadened Vitasoy plant milk portfolio. We already had a broader offering with respect to competition with our two soy lines and variants in rice and oat. We are basically adding to the existing portfolio as of the last 2 months, we launched 2 months ago, a new almond blends line, two SKUs. These are very important because over the last year and a half, the most dynamic segment in Australia of plant milk has been the almond segment, a segment where in the past we were absent. Okay? This is sort of entering a fast-growing, sizable segment in our core categories with two new SKUs. In addition to this, at the same time, we have also been first mover in launching coconut. Again, coconut also is done, and that is a coconut milk. It is not coconut water. Okay? It is a coconut milk. It is a functional breakfast beverage. This is also a segment that when we are looking internationally, primarily in the U.S. and in Europe, has picked up and become sizable. Okay? We are able to basically go with these four SKUs and drive the whole line up now going forward. Let me now complete with the last two markets, starting from our North American business. We mentioned at the beginning of the conversation that we had a disappointing first half in our North American business. The overall revenue grew 4% versus last year growth of 5%. So on the revenue side, it was in line with our past performance. However, we registered an OP loss, okay, of $5 million. Last year, we lost $2 million at the same point in time. Normally, the first half of the year, because of seasonality of the categories and the way our category mix works, we have the second half that is better than the first half. That is normal. Okay? But what happened in this particular case was the result of a very different performance in between the two businesses that we have in the U.S. As you know, we have that more than a third of our business is what we call an Asian business, meaning this is import products from Hong Kong, locally produced, contracted soy milk, and also locally produced tofu. This part of the business did very well. This part of the business grew double digit. However, the mainstream business, what we call the Nasoya brand in tofu, the one we are selling the main U.S. retailer, somehow did not perform very well. There is a combination of things. We had a flat top line, and this happened despite the fact that we introduced. Let me catch up here with the slides. I mentioned on Asian, we launched a new Vitasoy refrigerated soy milk. This is quite important. This was a key driver of the better performance of the Asian channel. On mainstream, we had a flat performance on the top line, and the revenue that were meant to come by a launch that we did, behind which we then also spent more marketing money, was below our expectation. This is the form that we judged interesting, is a Nasoya TofuBaked. It is a ready-to-eat tofu, so going from the water block to a more convenient form to basically eat tofu. So far, the acceptance in terms of retailers and in terms of consumers, has been below expectation. In addition to this, we had obviously some level of marketing investment to go behind it, and a situation where transportation and utility costs in general, in the northeast of the U.S. on a macro level, has been unfavorable. Now, as we go forward, it is very clear that in the second half, our focus will be on the bottom line. We want to drive our portfolio in Asia, and want to drive these new refrigerated Vitasoy lines that we have done, where we had very positive response. As for the mainstream, we need to basically improve performance, secure a better category mix, and be able, like we did last year, to have a second half that is going to be profitable. Now, let me now close in moving to Singapore. Singapore overall delivered a 2% growth in the top line, and somewhat a lower bottom line by 9%. What happened was that in terms of our core business in Singapore, we grew high single digit, but we had a loss in our export business. Around 10% of our business in Singapore is tofu that we are exporting outside of Singapore, and there has been some aggressive activity, primarily by Malaysian-based lower cost producers, that has obviously impacted us in these six months. As a result of that, we got a bit of a flex there. But again, in terms of Singapore core business, we registered improvement in the base business, and over the last six months, our Unicurd brand has become the number one tofu brand in Singapore, which it was not last year. Last year, we were number two. We have also done something else. We have become more keen on making sure that in Singapore we do not leverage only the Unicurd equity, but actually find a way to start scaling up our Vitasoy brand equity. With that in mind, in the first half of the year, we launched a new Vitasoy on-premise chilled beverage. This you would find in the food courts in Singapore. It is still small now, but it plays a role in starting to build a Vitasoy equity and Vitasoy strength that can enable us later on to put on this platform everything else that we are launching and leveraging across the group. Obviously, as we go forward, in Singapore, we need to scale up the operation, and we continue to drive our Unicurd business, but we want to scale up our core Vitasoy equity. Over the last two months, in addition to the on-premise, we have introduced a whole new Vitasoy-branded tofu. In addition to the Unicurd brand, now if you go to Singapore supermarkets and hypermarkets, you will find a premium Vitasoy organic sprouted tofu. Just launched. It is a price premium proposition, and is designed to really go beyond the current offering that is available in the market, and together with what we are doing with the on-premise, to continue to grow the awareness of Vitasoy in the Singapore market. In addition to drive the new Vitasoy tofu, we will continue to expanding our on-premise Vitasoy chilled, and do a fair amount of trial activities to scale up the operation in Singapore. Having gone through the market by market, I would like to close by recapping a bit the growth model that we shared last time, and the rationale for it, for total clarity. First of all, last time we discussed our approach, we talked about the fact that, we believe we have at our back some what we call tailwinds, some favorable winds in terms of market, retailer, consumer, because there is a clear interest towards improved health and wellness, towards nutrition, taste, sustainable products. We believe we operate in the space that has encountered favorable consumer retailer market response. We also believe that as a company, as a group, we can rely on some core strength in being able to build brand equity, in being committed to the quality of our manufacturing and approach, in having a commitment to creating our own infrastructure and be able to do that. And also have a workforce, our people being very competent and being very passionate. We want to put this at the service of accelerating our core business. You will find this sentence, "Accelerating our core," meaning we have core geographies, we have core categories. That is where the focus is going. I think that if you look over the last six months at some of the innovation and some of the focus that we shared in this presentation, it starts becoming pretty clear where the focus is. Accelerating our core via three growth vectors: execution, expansion and innovation. Execution means growing per capita consumption where we already exist, going deeper. Expansion is primarily geographical expansion. Then innovation is, you have seen how in each market and in each core category, we want to provide our markets with some innovative, premium, differentiated product to accelerate the growth of the business. We believe that by operating this way, we are going to be able to secure our long-term position. We're quite confident about this approach, and we are going to be staying very determined to continue to stay very focused, very humbly focused in executing and implementing our progress going forward. I think that's the end of our presentation.