KT&G Corp
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KT&G Corp
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[Interpreted] Ladies and gentlemen, thank you for attending today. We will now begin the Conference Call for KT&G's 2023 Second Quarter Earnings Report. After the presentation from KT&G, there will be a Q&A session with the participants to the call. [Operator Instructions]
We will now begin with KT&G's presentation.
[Interpreted] Ladies and gentlemen, this is [ Kay Park ], Head of Investor Relations at KT&G. Thank you for attending KT&G's 2023 second quarter earnings report call. Please allow me to first introduce the KT&G management team in attendance for the call today. We have Mr. Kyung-Man Bang, Chief Operating Officer and Member of the Board at KT&G; Mr. [ Jin-Han Kim ], Chief Strategy Officer; Mr. [ Seong-Sik Park ], Chief Marketing; Mr. [ Kwang-Il Park ], Chief of Real Estate Business; Mr. [ Jae-Yeong Cho ], Chief of Global Business; Mr. [ Dong-Pil Kim ], Head of NGP Business; Mr. [indiscernible], Head of Strategy and Planning; Mr. [ Yong-Beom Kim ], Head of Finances; and Mr. [ Kyu-Beom Lee ], Chief of Strategy at KGC.
I must advise you that the earnings we are about to present today are currently being audited by the outside auditors, therefore, are subject to change in the audit process. And any forward-looking information discussed in the call today may differ from the actual results to be reported in the future.
With that, I will now hand it over to Mr. Kyung-Man Bang, our COO to brief everyone on this year's shareholder returns before we announce our Q2 numbers.
[Interpreted] Hello. I am Kyung-Man Bang, Chief Operating Officer at KT&G. I would first like to extend my gratitude to all of you listening for all the interest and support you have given to our company.
Despite rapidly changing industry trends and uncertainties in the business environment, KT&G has been doing its utmost to enhance shareholder value. With the purpose of providing predictability on our mid- to long-term shareholder return policy and expand shareholder value, we have been carrying out from 2021 to 2023, a 3-year mid- to long-term shareholder return plan in the scale of KRW 2.75 trillion. In the process, we have executed shareholder returns of KRW 1,862.7 billion, reaching 94.2% in total shareholder return rate. This year, which marks the last year of the current return plan, we will be executing the remainder of the shareholder returns, which is to be around KRW 900 billion.
With regard to this, the Board has approved a plan for executing shareholder returns for year 2023 today. First of all, we have decided to pay interim dividends, which is a first in our history for which interim dividends of KRW 1,200 per share will be paid by 23rd of August. Total EPS for fiscal year 2023, including the aforementioned interim dividend, while still subject to change depending on the business performance, cash flow and investment, is expected to increase at least by KRW 200 versus the previous year. Year-end dividends will be confirmed after deliberations at the Board meeting early next year, with final decisions to be made at next year's AGM.
Next is on treasury shares. The Board has resolved to acquire treasury stocks in the scale of 3.47 million shares or 2.5% of outstanding shares in the market and to retire them in full immediately after acquisition is complete. This comes in 14 years since the last share cancellation back in 2009. To take a step further, KT&G intends to continuously enhance shareholder value in the mid- to long-term horizon, with an even enhanced shareholder return plan that includes further cancellation of stocks, a plan which we are reviewing in-depth with more granular details to be announced in Q4.
Respected shareholders, based on sound finances, KT&G has been sustaining investments for the long-term and enhancement of shareholder value, in parallel to execute shareholder return plans at the highest level among companies in Korea. The Board and the management firmly believe that the essence of elevating shareholder value lies in continued growth of the company. That being said, we believe in the importance of striking the balance between short-term shareholder return and long-term shareholder value and estimate while building an efficient finance structure.
To that end, it is the KT&G's intention to solidify our market-leading position in our major businesses, while at the same time, strengthen the grounds for sustainable growth in our 3 core growth pillars, namely NGP, Health-Functional Food and Global CC. I ask for the support from all our shareholders and members of the capital market in KT&G's unwavering and bold attempt to transform to a global leading company. Going forward, we promise to tune into what our shareholders have to say and proactively communicate with the market with transparent and reasonable policies.
Thank you.
[Interpreted] Now, Mr. Jin-Han Kim, our Chief Strategy Officer, will represent to you the 2023 second quarter results. [Interpreted] Ladies and gentlemen, I am Jin-Han Kim, CSO at KT&G. Thank you for attending our quarterly earnings report call today, despite your busy schedules. For today's presentation, I will begin with the highlights of our consolidated results and move on to each business segment.
Starting with the key takeaways of our second quarter results. Our NGP business continued with its exponential growth in volume in the second quarter, especially overseas, with accelerated market penetrations from expanding customer base in existing markets. We saw 72.7% growth year-over-year in stick volumes, continuing its massive growth trend. Moreover, the increase in the share of sticks within the revenue mix is leading to improved profitability and we expect this effect to carry on into the second half of this year. In export combustibles, through pricing in some regions, including the Middle East, we recorded 6% growth in revenue and 42.6% growth in operating profit year-over-year. Going into the second half, we will expand the share of premium segment products, as well as engage in pricing in existing markets, while at the same time, utilize mid- to low segment products to penetrate into new markets, a dual-track approach we are planning to take to accelerate our blitzscaling.
In Global Health-Functional Food, quarter revenues grew 31.4% Y-o-Y, in line with the business' growth trend. Especially revenues in China, our top priority target market, grew by 132.2%, driving the overall revenue growth in Global Health-Functional Food and the share of global operations in Health-Functional Food business grew to 25.7%. Going into the second half, the plan is to continue with our strategy of aggressive penetration into China as part of our focus on global revenue growth. While cost headwinds caused by global inflation and the impact of shrinking profits due to the completion of real estate projects are expected to last throughout the year, we do expect the second half consolidated results to show some gradual recovery versus the first half, driven by growth in our 3 core businesses. I will now move on to the Group's consolidated earnings.
Our Q2 revenues impacted by reduced numbers from the Real Estate business due to the imminent completion of the Suwon property project were down 5.7% year-over-year at KRW 1.336 trillion. Operating profit for the quarter was impacted by growing pressure from global inflation-induced cost headwinds and reduced profits from Real Estate, contracting by 25.9% year-over-year to KRW 242.9 billion. Net income affected by variances in currency during the quarter was down by 41.3% Y-o-Y at KRW 199 billion, translating to KRW 1,702 in earnings per share in Q2. Second quarter EBITDA was down 21.2% Y-o-Y, standing at KRW 302.4 billion, with EBITDA margins at 22.6%.
Zooming in on the major factors behind movement in profit compared to the previous year. In the Tobacco business, while there was upside pressure in profit by KRW 15.7 billion with volume variances and FX tailwind, there was also downside pressure of KRW 72.9 billion from changes in the price, product, and region mix, including impacts from tax hikes and pressures in raw material costs due to global inflation. Other business segments, including pharma, showed improvements in profit by KRW 3.4 billion, but due to reduced profits of KRW 30.9 billion in Health-Functional Food and Real Estate, operating profits on consolidated basis were down by KRW 84.7 billion year-over-year.
I will now move on to the details of each business. Beginning with our Tobacco business consisting of domestic and global cigarettes and NGP. At the top line for our tobacco business in Q2, despite solid performance from domestic duty-free and NGP sale and improved revenues in global export CC due to the contracting domestic combustible markets, unfavorable comparison for our global NGP device revenue versus the previous year, increased in excise tax in Indonesia, among other damaging factor to the market environment led to a 5.7% Y-o-Y decline in revenue, which stood at KRW 888.1 billion.
First half cumulative revenues were down 1.3% at KRW 1,745.7 billion. At the bottom line, aggravating cost headwinds due to steep rises in material prices, including tobacco leaf and Indonesia cigarette volumes entering the maximum tax bracket, drove profits down by 19.1% Y-o-Y to KRW 242.6 billion. Operating profits for the first half cumulatively was down 14.4% at KRW 479.2 billion. However, share of global operations within our Tobacco business, thanks to the combined growth of NGP sticks and cigarette volumes, was up 2.4 percentage points to reach 56.6%.
I will now go into the different segments of our Tobacco business. In domestic combustibles, Q2 domestic combustible volumes suffered from a contracting market size reducing by 3.1% year-over-year to 10.37 billion sticks. KT&G market share overcame fiercer competition triggered by aggressive new launches from competitors in the first half, with strong performance from super slim products to rise 0.1 percentage points Y-o-Y at 65.5%.
In terms of revenues for domestic CC, rebounding air travel led to a rise in higher ASP duty-free volumes by 48.1% Y-o-Y, but this was more than offset by regular channel volumes being reduced due to a smaller market size with overall revenues down by 2% at KRW 426.6 billion for the quarter and first half revenues down 0.8% Y-o-Y at KRW 816.3 billion.
Moving on to global cigarettes. In export cigarettes, delays in shipment in some regions, including Asia Pacific and the Middle East, drove down Q2 volumes, but this was more than offset by pricing in some markets, leading to revenues climbing by 5.9% year-over-year to KRW 152.9 billion. However, despite volume growth in Russia and Turkiye subsidiaries leading to global subsidiary volume growth by 20.4% Y-o-Y, unfavorable comparison due to our Indonesia volume surpassing the threshold for maximum tax bracket drove down revenues by 9.7% at KRW 112.6 billion. Global CC revenues for the first half recorded KRW 530.6 billion, a 7% increase Y-o-Y. In the second half, we expect to see robust growth in global subsidiaries, recovery in the Middle East, volume growth in new markets and pricing, creating a synergy to support growth year-over-year.
Next to NGP business results. NGP, one of our core growth drivers, continued strong growth in domestic and global stick volumes in the second quarter, expanding by 43.5% Y-o-Y to reach 3.63 billion sticks. However, when it comes to global NGP revenue, due to unfavorable comparison versus the volumes of preemptive shipment of devices in the previous year to mitigate the global supply chain disruption, the numbers were down and this impact more than offset the increase in domestic NGP revenue to drive down total NGP revenue for the quarter by 17.7% year-on-year to KRW 190 billion. But we still do expect revenues for the entire year to grow Y-o-Y supported by robust growth in stick volume.
Allow me to go in detail into the numbers -- our NGP numbers in and outside Korea. In Korea, penetration of the heat-not-burn category in the first half increased by 2.1 percentage points to reach 19.2%, showing a continuous rise in demand for the category. KT&G's share of segment in the first half was 47.4%, maintaining market leadership amid intensifying competitions with line of extensions and aggressive marketing from competitors. In global NGP, we expanded our consumer base in markets where we already have presence, which supported an exponential growth in stick volumes by 72.7% year-over-year. As we expect such penetration into the global market to expand further, we also look forward to better profitability from the business as stick shares within the revenue mix increases.
Moving on to Health-Functional Food. Q2 revenues for Health-Functional Food, despite higher than 30% growth in global revenue due to the subdued domestic HFF market reduced by 2.2% Y-o-Y to KRW 260.8 billion. Operating profit for Q2 with preemptive marketing investments made for sustainable growth in the global business saw further losses Y-o-Y, but cumulative profits for the first half increased by 102.3% to KRW 44.3 billion, giving us some confidence to meet the guidance profits for the year. As overseas business continues to grow, share of global operations in revenue was also up 6.6 percentage points Y-o-Y to reach 25.7%.
A little bit further into our domestic and global HFF business. Domestically, while duty-free channel supported by a rebound and international air travel showed growth in revenue by 90.8% year-over-year, a record high inflation led to a subdued consumer sentiment and HFF demand and waning COVID led to slower growth in online channels and teleshopping revenues were reduced strategically to improve profits, all combining to drive down Q2 domestic revenues by 10.1% to KRW 193.9 billion and first half revenues were reduced 7.2% to KRW 514.1 billion. Globally, the Chinese 618 Festival promotions supported solid growth, leading to expanded market penetration into China, focusing on online channels and in turn a 132% rise in revenues in China, driving the entire global HFF business revenue that grew 31.4% Y-o-Y to reach KRW 66.9 billion. Our objective is to continue to focus on online channels to further nurture the Chinese market for continued growth in global revenues.
Lastly, on our Real Estate business. At the Q2, Real Estate top line, despite additional revenues from new projects, including DNC Deok-eun, due to our reduced development business with the Suwon project coming to an end, revenue dropped by 21.3% year-on-year to KRW 113.7 billion. In operating profits, on top of the imminent completion of Suwon, the full completion of Gwacheon Sangsang PFV also added to the drop in recognized profits, as well as the number of costs related to new development projects, driving the overall operating profit for the business down by 73.5% year-over-year to KRW 11 billion. While the P&L impact from the completion of the Suwon development project is expected to last throughout the year, we will do our utmost to minimize this by engaging in new development businesses to curb potential dents in revenue.
Thank you. With that, we conclude the KT&G 2023 second quarter earnings briefing. We are now happy to answer your questions.
[Interpreted] [Operator Instructions] The first question will be provided by Sunwoo Kim from Meritz Securities.
[Interpreted] I would like to ask 4 questions. The first has to do with the tobacco leaf cost issue. It seems that there is a 1 year lag. So the pricing as of today is going to be reflected in 1 year's time. So I would like to understand as to what your projection is with regards to the cost rate for the raw material going forward?
Second question is with regards to your duty-free business, the growth has been quite robust. I would like to get some color as to what your outlook is for the second half of the year. And if you could provide a guidance, that would also be quite helpful.
Third question relates to your second half NGP stick. Any new markets that you're currently envisioning within the domain possible? I would like to ask you to share with us any specific volume forecast or countries that you're currently planning to enter into?
Fourth question is, yes, the market is quite positively receiving your announcement on the interim dividend payout and I'm sorry that I have to ask you this question on this very day. But I would also like to get some understanding as to what your take is with regards to possibility of introducing quarterly dividends going forward.
[Interpreted] Yes, relating to the question on the cost burden coming from the raw material, the tobacco leaf and any time lag, as well as the projections going forward, as well as the quarterly -- possibility of a quarterly dividend payout, our CSO, [ Jin-Han Kim ], will respond to that question. In terms of the question relating to the duty-free business and our projections going forward, I'm going to have our Chief of Marketing, [ Seong-Sik Park ] will respond to that question. Regarding your question on HFF, [ Kyu-Beom Lee ] will be responding to your question.
And then on NGP outlook, [ Dong-Pil Kim ] will respond to your question. [Interpreted] Responding to your first question on the cost burden coming from the tobacco leaves and how long we expect this is going to continue into the future, as you know, back in year 2022, the international price on tobacco leaf has gone up and also there has been global inflation that impacted other auxiliary raw materials that we were using, causing a cost burden for the company. In terms of the tobacco leaf price trend in year 2023, we think the trend is going to be more or less similar to what we've seen in year 2022. So the trend is going to be quite moderate.
So the prices that we purchase the tobacco leaf at in year 2023 will then translate as a cost burden come year 2024 and although cautious, my projection is that, that cost burden is going to be quite similar compared to what we've experienced in year 2023.
Now, having said that, in terms of the cost rate compared to the combustibles, NGP consume less of tobacco leaf. So if we are able to further increase the volume of the NGP sales and if that extent is much greater, then that's going to drive down the cost rate to a certain extent. But in light of the NGP growth rate, I cannot say that decline is going to be all that meaningful, but although cautious, we are projecting and hoping for a more moderate burden come year '24.
Regarding the second question on a possibility of a quarterly dividend payout, the company has -- the BoD of the company has made resolution to provide interim payment, semi-annual dividend payment this year and in the previous General Meeting of Shareholders, we made changes to our Articles of Incorporation that will allow for a quarterly dividend as well. And the company also voted for that as well. So as we enter into the second half, we will listen to the views of our shareholders and investors, as well as market in general and gain their feedback.
And we will very closely review actively the possibility of actually carrying out with a quarterly dividend. [Interpreted] Hello, I am [ Seong-Sik Park ], Chief of Marketing, responding to your question about the growth rate that we are seeing for duty-free business and what our outlook is for the second half of the year. In the second quarter, we've seen increases in air travels, as well as travelers. And we've seen our sales as well as -- sales volume, as well as revenue all grow on a year-over-year basis. In terms of volume, there was an increase of 48.1%, revenue 59.5%. So we are seeing recovery in the overall duty-free business, but there has been some fluctuations in the -- or the movement in the FX rate.
And in terms of the amount of traveler -- the air travel, the air flight that is being scheduled has not yet recovered to the previous level, the pre-COVID level. So there are still uncertainties that are -- there are certain uncertainties that currently exist. So it will take a bit of time for us to see how -- to what extent we will be able to see the normalization. Now, having said that, based upon the scenario of a gradual recovery, we have put in place a portfolio of products that will enable us to be very nimble in responding to the market once that recovery fully kicks in. [Interpreted] I am [ Kyu-Beom Lee ], the Chief of Strategy at KGC. I will respond to your question about HFF and our duty-free channel. If you look at the recovery that we've seen in terms of the number of flights compared to pre-COVID levels, we've seen about 80% recovery.
And if you look at our DFS revenue of KGC, it has outperformed that improvement in the recovery of the air flights. So on a year-over-year basis, we were able to report a 90.8% top line revenue growth. But still we haven't seen a full recovery of the air flights and there's still a limitation in terms of the inbound Chinese group tourists. So at this point, we believe that we have recovered about 50% versus the pre-COVID level. However, we think that as we go into the second half of the year, we think that this uptrend is going to continue. But once again the resumption of Chinese group tourists coming into Korea is currently at this point, not as clear, and it is an issue that is subject to some political, as well as social issue.
And it is a channel that is exposed to that volatility relating to political and social issue. So we are preparing to make sure that once we enter into the phase of recovery that we could leverage off that opportunity in a nimble manner. [Interpreted] I am [ Dong-Pil Kim ], Head of NGP responding to your question about our NGP business and global expansion. Thanks to our efforts to grow the volume up until last year through global expansion, we have been able to enter into a total of 31 countries around the world, which actually account for 80% of the global HNB, heat-not-burn, consumption. As a result, based upon this foundation, we will continuously expand on this basis and increase our penetration, which will be our key direction for our global NGP business.
As mentioned during the presentation, our volume of global stick sales have been increased -- has gone up by 72.7% in the second quarter and we expect going forward that the penetration into already -- the markets where we're already in will further expand. And once we increase the share of such revenue coming from the sticks, we think that this will also contribute to our profitability.
In terms of the new markets that we will enter into, we will analyze various different aspects from many different angles in terms of the size of the local markets and the potential for business growth and we will make appropriate decision.
Regarding the specific names, due to the agreement and non-disclosure, please understand that I won't be able to specify the names.
[Interpreted] The following question will be presented by Sang-Jun Park from Kiwoom Securities.
[Interpreted] I have about 3 questions. First is still on your tobacco leaf, your cost structure. The price of the tobacco leaves have really undermined your profitability. Hence, I would like to understand what your strategy is to overcome this issue. Do you have plans to further increase your pricing in the future?
Second question has to do with your global NGP business. As you've mentioned, your NGP global volume has really risen quite significantly, and even compared to Philip Morris, that percentage is not small by any means. I would like to understand whether you can share with us any country or any city basis market share number. I don't know whether you have it, but if you do, please share that with us.
Third question is on -- in the Indonesian market, your sales volume has risen quite significantly, but for you to continuously drive that growth in volume, I would presume that you would need some new lineup of products. So can you share with us what your product strategies are?
[Interpreted] The first question on the cost burden from tobacco leaf, our CSO, [ Jin-Han Kim ] will respond to the first question. Second question was on global NGP, whether we are able to share any performance figures for country or per country or per city, I would like to invite Head of NGP, [ Dong-Pil Kim ] to respond to that question. Third question on Indonesian sales and what our product strategy is for that market, I'm going to have [ Cho, Jae-Yeong ], who is Chief of Global Business to answer that question.
[Interpreted] This is the CSO responding to your question about how we are going to ease the cost burden and overcome this issue. There are actually 3 different types of efforts that we've been putting in. First is, our own cost saving effort. One of the way is to diversify the sourcing of the materials or we can actually substitute to the tobacco leaf to a lower grade one, which would be more reasonable in terms of price and also rationalization of the specification which will help us with enhancing efficiency. So, in the first half of the year, through this effort, we think that we've been able to actually drive about KRW 10 billion of savings effect from this.
Second aspect is to focus on the high margin markets, such as the Middle Eastern market and Russia. We are at this point putting in place a very robust and strong and aggressive sales plan for the second half of the year, so that we may be able to expand revenue from these high-margin or highly profitable marketplaces.
And we think that once we do that we will be able to ease the cost burden. Also, there has been some additional agreements or contracts that we've already executed for the Middle Eastern market. And for Indonesian subsidiary, we have already passed through the most -- the highest tax bracket. And so, afterwards I think we will be able to further enhance operating profit.
And in terms of the export market, we have been continuously increasing the price for the export market and we are going through that process. And up until the end of this year, we will be able to finish that price hike.
Coming back to the raw materials, the key raw material for -- is, of course, the tobacco leaf, which I talked about, and there are some other secondary materials that we would have to use. And in light of the current inflationary trend or the coming down of the energy prices, we think that the cost pressures on the secondary materials that we use will somewhat ease. So that is something that we are looking forward to. So, all in all, through our efforts, we will make sure that we bring about cost savings and make sure that this doesn't really undermine our corporate earnings. [Interpreted] I'm [ Dong-Pil Kim ], the Head of the NGP business.
You asked whether we will be able to provide you with some breakdown of the market share numbers per country [Audio Gap] [Interpreted] As responding to your question, I am the Head of the Global Business. You asked about what our strategy is for Indonesia to grow that volume in the market and I can break that answer into 2 parts: first, distribution and the other is brand. If you look at Indonesia, aside from CVS channel, the wholesalers where there is an indirect sales relationship, actually take up 90% of the market. Now KT&G to this date, because of our brand awareness and our awareness in the Indonesian market, has not been able to crack that wholesaler channel all that well compared to our competitors.
But with the improvement of the brand awareness and also through many incentive or promotional activities that we will be -- we have been implementing against these wholesale merchants, we will be able to further increase the percent of products that we distribute through these wholesalers. And that will help us accelerate expansion of the coverage, as well as the growth of the product volume in the Indonesian market.
And another aspect is that, Indonesia, they have kretek and the SK -- the Juara is a brand name of this SK product. And in order to further facilitate the sales of these kretek, the SK product, we will be running TV commercials and many other promotional activities. So we want to make sure that following the Esse brand, we want to be able to set it up -- set Juara up as the second brand.
[Interpreted] The following question will be presented by Hyeeun Kim from Morgan Stanley.
[Interpreted] [Audio Gap] First question relates to your domestic NGP business. It seems on a Q-on-Q basis your market share seems to have dipped. And I think that may be attributable to your competitive brands like IQOS and ILUMA's market share. Since you've also launched 'lil HYBRID 3.0, I would like to know as to how you're going to drive volume in the second half of the year?
And another is that, when we look at your domestic NGP revenue and stick revenue, it seems like your device revenue had fallen. Is that correct? It would be helpful if you could provide color there. And also for your global NGP business, you are making investments and actually expanding the capacity. And so, I would like to know as to what your production mix is for your in-house -- based on your in-house capacity?
[Interpreted] Yes. I am [ Kim, Dong-Pil ], Head of NGP. I would like to answer your question. First, [Audio Gap] become much more fierce, but it wasn't just IQOS, but -- because we also released -- we also responded quite aggressively to that. So if you look at first half cumulative market share figure, our share was 47.4% and we've been able to sustain our strong market leadership. And in the second half, we do expect competition will be quite fierce as well, but with the release of 'lil HYBRID 3.0 and our assessment is that, the performance has been quite good. And hence, we are going to more quickly expand it nationwide, ahead of schedule so that we can further solidify our market positioning and our market leadership. So that we can actually maintain our edge within the domestic market.
Now, you asked about the device, the device revenue dipping, it may look so and there may be that impact because ILUMA had undertaken a very significant promotion, but we also have 'lil HYBRID 3.0. And so, in the second half of the year, we believe we will be able to bring improvements.
Now, with regards to your question on overseas exports, just once again, we are bound by agreements. So, I hope you understand that I won't be able to share with you any specifics. [Interpreted] Well, thank you very much for joining KT&G's second quarter 2023 earnings conference call. Thank you for joining us. And if you have any follow-up questions, please do not hesitate to contact us at the IR team. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]