Vitasoy International Holdings Ltd

HKEX:345

Earnings Call Transcript 2021-Q2

[Unknown Executive]

Good afternoon, ladies and gentlemen. Thank you for joining us today for Vitasoy Interim Results briefing for fiscal year 2020/'21. Before we start, I 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. On the left-hand side of Mr. Lo, we have Mr. Chris Lau, Group Chief Financial Officer.

In the following session, we will have -- we will first have Chris to provide us with a review on the company's financial performance, followed by Roberto's presentation on the business review in different markets and outlook.

Before we start, you should see a Q&A input box at the bottom of the screen. Please feel free to drop us your questions any time during the presentation. Due to the time constraint, we might not -- we might only be able to address some of your questions during the Q&A sessions. For all the remaining questions, we'll address to you individually afterwards.

Now let's invite Chris to speak to us. Please, Chris.

[Kin-Shing Lau, executive]

Thank you. Good afternoon, ladies and gentlemen. Welcome to our interim result announcement briefing. Now 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 look at the financial performance. In the first half of the financial year 2020, our revenue contracted by 6% as most of our operating markets were negatively affected by COVID-19. Encouragingly, we have seen Mainland China starting to recover gradually since May 2020, while our other markets have been affected by pandemic effects and lockdowns.

Gross profit margin sustained at last year's level, mainly due to government subsidies, partly offset by unfavorable commodity prices, particularly sugar and milk powder. EBITDA for the interim period increased 27% to HKD 1.1 billion, mainly contributed by a reduction of advertising and other operating expenses during the pandemic period and also additional subsidies from government in Hong Kong, Mainland China and Singapore. As such, profit to shareholders increased to -- by 26% to HKD 672 million. We have started to resume our investment as the state of pandemic and economic condition improved in second half.

Now let's look at basic earnings per share. As a result, basic earnings per share increased 26% to HKD 0.361 (sic) [ HKD 0.631 ]. Now 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 6 months ended September 30, 2020.

Now let's look at CapEx. Capital expenditure incurred during the period was HKD 359 million, staying at a high level to support future business growth. The capital expenditure was mainly related to acquisition of production equipment for the new plant in Dongguan.

Now the financial position of the group remains strong. As at September 30, 2020, our cash and bank deposits was HKD 648 million. Our borrowings dropped by 80% to HKD 37 million only. As such, the gearing ratio of the group decreased to 8% at the end of September 2020. Now if we exclude the lease liabilities from total borrowings, the gearing ratio would be 1%.

Now let's look at ROCE. The group's return on capital employed, ROCE, increased to 30% as at September 30, 2020. 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 -- by market review and the upcoming outlook of the group's business. Thank you.

[Roberto Guidetti, executive]

Thank you, Chris, and good afternoon to everyone. The main message is that our business is recovering gradually and profitably from the pandemic. This is due to Mainland China starting to grow again and lots of helpful work in other markets, despite persisting adverse pandemic conditions.

Group revenues for the semester were down minus 6% at HKD 4.4 billion. Mainland China was down minus 2% in renminbi during the first 6 months of 2020/2021, but registered plus 4% growth versus last year in the May-September period. This was after a very low April at minus 23% due to the last month of the full pandemic impact, which affected both retail and manufacturing.

Group profits from operations increased by 29% as we reduced both CapEx and OpEx investments to synchronize with the trading limitations in all markets. As the economy recovers in Mainland China, we are gradually resuming our spending to ensure that our brands continue to build brand equity, awareness and trial for the long term. Government grants to maintain employment provided us ulterior support on profit growth. Excluding subsidies from government in Mainland China, Hong Kong and Singapore, profits from operations would have grown by 10%.

Our other markets were affected by the pandemic even more strongly. In Hong Kong, revenue dropped minus 14% due to the repeated waves of pandemic and social unrest, which uniquely affected our Vitaland school business. Australia dropped revenue due to extended lockdowns in Victoria, our main state, as we are still reliant on imported soy raw materials due to the previous drought. This has further affected our gross profit margin.

In the ASEAN cluster, both Singapore and Philippines showed resilience with moderate growth despite the pandemic limitations. Encouragingly, all the precautionary safety measures we took to protect our people and the integrity of our infrastructure from the pandemic have worked with all associates healthy and our production plans all open and operating. And our new plant in Dongguan, China, has commenced its production since August, ahead of schedule. We are confident that a sustainable plant-based movement keeps growing even stronger during the pandemic, and thus propelling shopper and retailer interest in our portfolio for continued long-term growth.

Now moving to results overview by geography. Mainland China and Hong Kong both declined in revenue but grew operating profit significantly, driven by a reduction of OpEx investment and government support mentioned earlier. In both markets, hyper and supermarkets and online performed well, but convenience stores, general trade and on-premise suffered due to the lockdowns.

Australia drove both revenue and operating profit as a result of extended lockdown. Singapore showed resilience as our local tofu business benefited from a surge in home consumption. As a result of all this, Mainland China slightly increased to 71% of the group's total revenues. Hong Kong and Australia, New Zealand contributed 22% and 6%, respectively, while on the profit, Mainland China's proportion is slightly higher than that of revenue, given strong growth in this semester.

So let me start by market review from our biggest markets, Mainland China. Mainland China revenues slightly decreased by 3% in Hong Kong dollars to HKD 3.1 billion, mainly affected by a low April where the business was down in revenue by minus 23% versus the same month in 2019, the last month of aggravated COVID-19 impact with retail and manufacturing being affected. Our revenue started to grow gradually since May and registered 4% growth versus last year between May and September 2020. We've been mindful to invest only once the pandemic conditions have eased and shoppers are again able to freely buy goods, not only online but also in physical stores.

As a result of this delaying of normal investment, cost-saving initiatives and government subsidies, we delivered a significant growth in operating profit of 25%, which we are now gradually spending in the second half of the fiscal year. The pandemic was more favorable to VITASOY and our nutrition portfolio, which saw significant growth online and in hyper/supers, while VITA Tea was more affected by reduced traffic in the on-the-go and on-premise channels. Going forward in the second half, leveraging the improved pandemic conditions in Mainland, we will revert to advertising and promotion investment to continue the building of the VITASOY and the VITA equity. We will also continue to increase national presence of our core portfolio. Our Dongguan plant has commenced production smoothly, providing us additional capacity to enable our growth in Mainland China.

On top of driving our core assets, we are also excited to announce a whole new VITASOY HEALTH PLUS. The new VITASOY HEALTH PLUS restages our upper tier nutrition platform with a brand-new packaging and 5 variants. Three variants are soy, including a high-protein and sweetened, making it a super healthy nutritional product. We have also introduced 2 new variants that premiumize the plant-based nonsoy space. The first is premium oat milk and quinoa; and the second is almond milk and macadamia. These are most innovative in the mainland China context. We are confident they will not only deliver extra profitable growth but also driver our VITASOY nutrition credentials and brand equity for our long-term success.

Let me now move to our Hong Kong business. Hong Kong revenue was down 14%. The pandemic and social unrest on top of its abnormal impact also drove down the revenue of our Vitaland schools business due to repeated closures and irregular activity. We expect the situation to persist in the second half of this fiscal year. Similar to Mainland China, home consumption channels, supermarket and e-commerce registered growth, helping us to further strengthen our market share leading positions of our core categories. Despite these short-term challenges, we are determined to grow our business in the long term. Strong campaigns and initiatives for both brands, VITASOY and VITA, will be resumed gradually to coincide with the recovery of the economy.

Let's review our Australia and New Zealand business now. For Australia, New Zealand, in local currency, revenue dropped 4% as the pandemic heavily affected our on-premise channel, which is quite developed in this market. Coffee shops and restaurants, where we sell our Barista formulations on soy, almond and, more recently, oat were forced to close as a measure to curb the pandemic, hence affecting our revenue.

The last few months of shortage of local soybeans due to drought continued to affect our gross margin as more expensive soybeans were imported from the United States for production. While this issue has now been resolved with additional soybeans planting in another area of Australia, this was an additional reason why this semester profits from operation dropped 13%. Our team has led with agility in these conditions by recently launching a new high-protein portfolio that is suitable for the home occasion. And we expect that these items will deliver a meaningful growth contribution going forward.

Now moving to our ASEAN business, starting with Singapore. Singapore business grew revenue by 7% to HKD 60 million, mainly driven by growing both the local tofu and the imported beverage business. Operating profit increased by 158% as a result of revenue growth, effective expense control and government employment subsidies.

And let me now close the by-market review with a few words on our business in the Philippines. As the Philippines experienced one of the most extended lockdown in the world, retail closures and disruptions significantly reduced shoppers traffic. As a result, we have adjusted our pace of advertising investments to tailor to these very unique conditions. Our production line in the Philippines now enable us to customize new single-serve offering for better distribution and more affordability. Our 1-liter pack for the home occasion has been vibrant during the pandemic, building nutrition credentials for VITASOY.

So to summarize, and in short, our business is recovering gradually and profitably from the pandemic. Group revenues for the semester were down minus 6% at HKD 4.4 billion. Mainland China was down minus 2% in renminbi during the first 6 months of fiscal year 2020/'21, but grew plus 4% versus last year in the May-September period after a very low April at minus 23% due to the last month of full COVID-19 impact. Profits from operation increased by 29% as we reduced investments. Excluding subsidies from government, profit from operation would have grown 10%.

Hong Kong and Australia were affected by the pandemic even more strongly. In the ASEAN cluster, both Singapore and Philippines showed resilience with moderate growth. Encouragingly, all the precautionary safety measures worked well with all associates healthy and our production plants all open and operating. And our new plant in Dongguan, China has commenced production since August, ahead of schedule. We are confident that the sustainable plant-based movement keeps growing even stronger during the pandemic, and thus propelling shopper and retailer interest in our portfolio for continued long-term growth.

This ends our presentation, and so we can open up the floor for questions.