Earnings Call: H1 2014

Nov 27, 2013

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy Interim Result briefing for the fiscal year 2013 to 2014. Before we start, we would like to introduce you the senior management of Vitasoy Group. Sitting in the middle is our Executive Chairman, Mr. Winston Lo. Good afternoon. On his right-hand side, we have Mr. Roberto Guidetti, our Group Chief Executive Officer. Good afternoon. On Mr. Lo's left-hand side is Ms. Kitty Fung, our Group Chief Financial Officer. In the following presentation, we will have Kitty to provide us with a review of the Group company's financial performance, followed by Roberto's presentation on the company's operational reviews in different markets and outlooks. We will then have a 15-minute Q&A session. Now, let's invite Kitty to give us a presentation, please. Kitty, please. Oh, thanks, Angela. Good afternoon, ladies and gentlemen. Before we start our presentation, I would like to draw your attention to this disclaimer regarding the forward-looking statements in this presentation. Now, let's share with you our financial performance for the first half of fiscal year 2013/14. The Group's total turnover reached HKD 2.3 billion, an increase of 9% from same period last year, and this increase were across almost all operations. Gross profit was at HKD 1.1 billion, up 11% from last year, basically driven by sales growth. Despite the cost increase in some of the raw materials, particularly milk powder and soybean, gross profit margins still slightly improved to 48% as compared to last year's 47%. This was attributed to our tactical pricing strategy and our improved manufacturing efficiency. But we expect the continued increase in commodity costs will put pressure on gross margin for the balance of the year. In spite of the rising operating costs and increased brand investment, profit before taxation still improved by 9% to HKD 265 million. This was attributed to the solid sales growth in most operations, the cost controlling measures in order to protect margin, and the exercise of prudent cost management. EBITDA for the interim period was at HKD 364 million, up 6% versus same period last year. EBITDA margin was maintained at 16%, same as last year. EBIT was at HKD 272 million, up 7%. Profit attributable to equity shareholders was HKD 182 million, an increase of 6% compared to last interim period. The increase was mainly driven by improved operating profit, but partly offset by the increase in income tax expense and the allocation of profits to non-controlling shareholders. As a result, basic earnings per ordinary share were 17.7 cents, improved by 5% from last interim period. In view of the Group's solid financial performance, the board of directors declared an interim dividend payment of 3.2 cents per ordinary share. Some items on the balance sheet. During the period, the Group has incurred total capital expenditure of HKD 86 million, and this mainly represent the upgrade of our equipments and facilities. Depreciation and amortization charges for the period was HKD 93 million, an increase of 7% as the new plant in Foshan and the production line in Hong Kong and in Australia were completed. The Group still maintains a very healthy financial position. As at 30th of September 2013, the Group had cash amounted to HKD 277 million, with bank borrowings and finance lease obligations total HKD 216 million. So you can see that the Group has achieved back a net cash position of HKD 61 million as compared to the net borrowing positions for the past couple of years. With shareholders' equity increased to HKD 1.7 billion and the group's ability to pay down bank loans through our internally generated cash, gearing ratio was now brought down back to 13% as compared to the 16% or the 24% at last interim period. Let's look at the group's overall turnover composition across operations. Hong Kong and Macau remain as our core markets. Yet you can see that with the growth in China, the contribution from China had gradually increased from 33% last year to 37% now, taking share from Hong Kong and other overseas markets. Looking at the turnover composition by product category, you will see that soy milk and ready-to-drink tea continued to be our key products, accounting for 48% and 25% of our total sales respectively. For the other product categories, their share composition remained relatively stable. 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 for the group. Thank you, Kitty, and good afternoon, everyone. It's my pleasure to present my first Vitasoy interim results today. Starting from the overall first half of 2013, 2014, we delivered consistent growth in sales and profit against significant headwinds. Our growth was broad-based, so all the categories and all the geographies grew. We started to work to build the foundations to accelerate our core business. In doing this, we maintained externally a balanced business approach in terms of our pricing. Internally, what we did is that we capitalized on our newly expanded plant facilities, improved manufacturing efficiency, and also worked on cost to protect margin. I'd like to start reviewing operation by operation, starting from Hong Kong and Macau. A good result in Hong Kong and Macau, 4% top-line growth and 3% operating profit growth. We had a good six months on our core business. Our soy business and our tea business grew strongly and consistently through product and promotion innovation. We also have achieved the number one share position in the fresh soy milk category with Sun Soya, our fresh equity in soy. Vitaland, our tuck shop business, despite in April, May, we lost two school days due to adverse weather conditions. We were able to actually grow strongly, and we were able also to increase the number of schools that we serve, and also improve the renewal rate of the school that we're serving. Our Macau business that is part of this cluster also performed very well. Obviously, the economy in Macau is growing, but in addition to the economy, there is clear increased consumer preference for our brands. This is going together with the fact that the team in Macau is executing with discipline and very, very strongly in the marketplace. Going forward, the plan for Hong Kong and Macau is to continue the good work, stay focused on growing our still drinks, and enhance our market leadership positions, but also make sure that we protect our gross margin via prudent cost management interventions. Mainland China had a great 6 months. We accelerated growth to 21% versus the same period of a year ago. Also, the good news is that our bottom line, our profit, kept pace with the top-line growth. This was driven by the fact that we developed a whole restage behind our main equity, Vitasoy, and the restage involves the packaging. We changed the packaging of the brand, and we did it to also harmonize with the Hong Kong packaging. As you can see from the image that I have here, same background, same English on the packaging, which I think is quite important in mainland China to have. Also, in addition, we inserted very important functional messages on the back of the pack to explain what the product contains and what does it do. Because obviously, in an environment where there isn't full awareness about our brand and about our equity, this is an important message. We also had a total integrated campaign that went together with the packaging restage and involved the communication in store, but also communication across the main media. I have the TV commercial that I wanted to share with you. I have it here. I'll share it with you. The TV commercial is basically emphasizing when to use. I mean, the ad, we call it, "Start Your Day Well with Vitasoy," and emphasizing who can drink the brand, basically everyone in different occasions during the day. Also emphasizing the key functional nutrition elements of the product. Okay, so let me now show you the TV commercial that has been airing in China to support this restage. So functional focus, but in our view, also delivering the warm character of the brand. I think you notice at the end, we also put the logo of the company, which is also another important message that we need to have when we communicate in mainland China. Going back to the presentation and shifting to our second big category that we are driving is tea. Obviously, Lemon Tea is doing very well. We are continuing to register a very strong consumer response, both where we have already started marketing, but actually in all the new channels and geographies as the proposition is expanded. We're very confident about us being able to keep developing. In Guangzhou and in Shenzhen, our data show that we're already the top 5 leading brands in the tea category, which is, we think, a very encouraging sign. In addition to driving the core brands, we obviously continue to expand our presence, and also we continue to execute our picture of success in the stores very well and with great discipline. Our sales teams are very clear in terms of what they need to achieve in hypermarket, supermarket, in small stores. There is a clear executional guidelines, and we find that they're able to keep improving their execution. That is also generating growth. Going forward, we will continue to stay focused on our core categories. We will make a special effort to grow not only the presence of our brands, but also the equity of our brands, because obviously, we need to make sure that there is not only trial and adoption, but understanding about the quality and the equity of these brands. We are very committed to secure that as we develop, we sustain a healthy margin, as you saw from the last six months. This is actually happening despite the fact that, as Kitty mentioned, we are exposed, like any company, to variations in commodity costs. So we were able to actually manage this in the first six months of this year. Go deep, go wide strategy is a theme which has been emphasized in the past, so going deeper where we are present and expanding our proposition where we are not. Australia and New Zealand, it was a strong quarter because in terms of growth, top line growth and local currency, we grew 8%. However, as you know, due to the weakness of the Australian dollar, when this local growth is converted into Hong Kong dollars, it resulted being a minus 2% in Hong Kong dollars. But on a local currency basis and on a local growth basis, was a strong semester. What is driving our business in Australia and New Zealand is being quite consistent. We have a team that is able to do quality branded activities and is able to innovate on both product and marketing. Australia, as of last month, in addition, similar to what China has done, restaged our core brand, the core proposition at the heart of Vitasoy, in a plan that involves not only packaging change, but actually re-versioning and above the line communication that is going to start very soon. Even before having deployed that, we have been able, over the last two to three months, to grow market share in our segments. So you are aware of the fact that last year, we completed a project that expanded our manufacturing capacity, and therefore, we are in a good position now to support additional growth in Australia. We are committed to continue to grow our core, but also continue to innovate. There is a big opportunity, obviously, to innovate, and in doing so, attract more consumers, more shoppers into our brands, into our categories, because compared to Hong Kong, obviously, Australia is quite developed in the Western world, but compared to Hong Kong, there is some room to go in terms of category development. North America registered a continuous sales growth, so we grew our sales 5% in the U.S. However, due to the fact that we also went on improving some of our manufacturing capacity and also higher maintenance costs, which were actually expected, we then registered a slight loss on the bottom line. The main drivers here, we have our Nasoya brand, which we have been restaging, and we have also been innovating by launching new variants of tofu under the line Tofu Plus. We are, in the U.S., obviously the leader of our category, and we are keeping growing share in our category, thanks to not only the Tofu Plus, but also we launched in the pasta subcategory, a new product called Pasta Zero, which is a low-calorie shirataki noodles product. We also continue our efforts to drive growth in our imported beverages into the Asian channel. Some of the initiatives that we have in the U.S. in the Asian channel are not necessarily initiatives that are coming from Hong Kong. The team has the ability to actually innovate locally, leveraging the group R&D resources. We launched a black soy milk with an innovative consumer campaign that was very well received. Going forward, this might have been discussed in previous sessions. We have a relatively cyclical business in the U.S. We have a second half where normally we have not only higher volume, but a better product mix. We are able to have higher pasta sales, which is more profitable, and higher soy milk sales instead of juice sales, which are also more profitable, and therefore, we expect to have a profitable second half and to reverse the loss in the first half. We'll also stay continuously committed to improve our manufacturing efficiency in North America. To close in terms of operating markets on Singapore. Singapore had a very good six months. It grew 3% on the top line, but it grew bottom line by 22%. It's an excellent bottom-line result. In Singapore, we have achieved, although by a small margin, market leadership position in tofu versus our key competitor. This has been done via a number of things. On the top line, there has been more focus on core items, and there has been the launch of higher revenue per case innovation. Here we are showing you the black tofu that the team launched. Internally, beyond driving this profitable product mix, the team has done some good work on costs. The combination of these factors have created this strong performance on the bottom line. In the second half, we plan to continue to leverage our brand strength. We don't have a brand with Unicurd that has necessarily the same equities that we have with Vitasoy, but we do have a brand that is very well-known, very well-known and very well-executed in the stores in Singapore. We believe there is a big opportunity to drive category growth as opposed to only market share-taking from key competition, i.e., attract more shoppers from wet market, vegetable market, loose tofu into packaged tofu. Obviously we will continue the course. We stay the course on innovation and managing costs, to secure that we continue to improve our bottom line going forward. In conclusion, we believe that it was a solid first semester performance. We achieved growth in both sales and profitability. We did that by strengthening our fundamentals and continuing to innovate on product and on marketing. We are happy to report that we didn't have just one market or one category doing well, but actually all the categories in all the markets grew. That is something that obviously we intend to sustain going forward. We have discussed over the last 10, 15 minutes, the fact that whilst we stay committed to do disciplined work on cost management, it is a fact that there are some commodity costs that we can't entirely control. Some of these might impact our business in the second half of the year. Having said that, we stay committed to do a very disciplined work on cost, a lot we've done in the second half to overcome these cost challenges. We have a strong commitment to strengthen our fundamentals of the business. To us, this is primarily product quality, holistic innovation, broader infrastructure, and actually people capability. We believe that by doing that, we should be able to stay on track with our strategic plans. We've been placing recently ever more attention to actually put even more investment and attention to our core business. That is really Vitasoy and tea, because we believe that by protecting that and accelerating that, we are in a better position to stay successful long term. Thank you for your attention. Thank you.