KT&G Corp
KRX:033780
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
83 500
123 000
|
| Price Target |
|
We'll email you a reminder when the closing price reaches KRW.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
KT&G Corp
You don't have any saved screeners yet
[Interpreted] Ladies and gentlemen, welcome to the KT&G 2023 Third Quarter Earnings Report Conference Call. We will begin the call with KT&G's presentation and then move on to Q&A. [Operator Instructions] Now we will begin KT&G's presentation.
[Interpreted] Ladies and gentlemen, I am [ Kate Park ], Head of Investor Relations at KT&G. Thank you for attending the KT&G 2023 third quarter earnings report conference call. Please allow me to first introduce our management in attendance today. KT&G Chief Strategy Officer, [ Shinhan Kim ]; KT&G Chief of Marketing; [ Sanshik ] Park; KT&G Chief of Real Estate business, [ Guanyoung ] Park; Chief Global business, Jae-Young Cho, Chief of NGP, Wang Seop Lim; Head of Strategy and Planning, Yun-Sung Koh, Head of Finance, [ Jungbun Kim ]; and finally, Chief of Strategy at KTC, [ Cuban Li ].
Please be advised that the numbers we are about to announce today are yet to be audited by our outside auditors and are subject to change in the auditing process and any forward-looking information and numbers mentioned in the conference call may not correspond to the actuals. And now allow me to welcome Mr. [ Shinhan Kim ], CFO of KT&G, to share with you our 2023 Q3 results.
[Interpreted] Ladies and gentlemen, thank you for attending this call despite your busy schedules. This is [ Shinhan Kim ], CFO at KT&G. I will begin today's presentation with major items of our consolidated earnings and move on to the numbers for each business segment. Beginning with the key takeaways of our Q3 results. In the third quarter, driven by revenue growth in the tobacco and real estate businesses, we reached record-high quarterly revenues and our operating profit also grew year-over-year despite continuing cost headwinds as we further improve our revenue mix, especially in global cigarettes, simultaneous growth in export and subsidiary volumes, combined with increased revenue across high ASP markets and pricing led to dramatic profit growth, hitting the growth prefect volume, revenue and operating profit.
Our NGP business continued on with its robust stick volume growth. Specifically for the global business, expanded penetration within large markets led to higher stick revenue within the mix and in turn, improved profitability. Also in the quarter, to enhance shareholder value, we purchased 3.47 million treasury shares from August 4 to September '22 and immediately canceled them after acquisition to reduce 2.5% of our total outstanding shares. KT&G will continue to do its our most to maximize shareholder value going forward.
Moving on to Q3 consolidated results for the group. Our Q3 top line, driven by higher revenues in tobacco and real estate grew by 4% to reach KRW 1.6895 trillion. In terms of our Q3 bottom line, despite continued cost headwinds caused by global inflation, top line growth and improved revenue mix in tobacco led to a 0.3% increase in operating profit, standing at KRW 406.7 billion. Net income for the quarter was impacted by currency fluctuations, leading to reduced valuation of our assets in foreign currency, seeing 28% Y-o-Y decline to KRW 333.3 billion and earnings per share at KRW 2,699. Q3 EBITDA saw a 1.7% increase to KRW 467.5 billion, with EBITDA margins at 27.7%.
Now I will go on to reasons behind the movement in our earnings. While organic volume growth and improvements to the revenue mix in tobacco was an upside by KRW 78.8 billion, cost increased due to global inflation and unfavorable currency movement diluted the profit. In Health Functional Food, we saw a KRW 10.3 billion decline, but with improved profits in real estate and other businesses by KRW 9.8 billion, consolidated operating profit rose by KRW 1.1 billion. Let us go into the details of each business segment. Starting with the tobacco business. Tobacco revenue for Q3 rose by 3.1% to KRW 972.7 billion as global cigarettes saw an uptick in revenue for the quarter. Operating profit saw aggravated cost headwinds due to a surge in material prices, including leaf tobacco and unfavorable currency, but still grew by 0.6% Y-o-Y to KRW 269.4 billion. Meanwhile, the contribution of international business within overall tobacco expanded by 4.9 percentage points to 57.9%, thanks to the combined growth of overseas NGP sticks and cigarettes.
Breaking down the tobacco business into segments. First, on Domestic cigarettes. Q3 Domestic CC sales was impacted by a contracting market volume, inching down by 2.1% Y-o-Y to 10.82 billion sticks. KT&G share of market overcame the aggressive new launches from competitors intensifying the competition in the quarter, thanks to rollout of our new products caring to consumer needs to see a 1.6 percentage point increase, reaching 66.8%, which is the highest in 15 years since 2008. Q3 revenues were impacted by a 72% increase in high ASP duty-free channel sales, partially offsetting the drop in volume with a 0.3% Y-o-Y decline standing at KRW 448.1 billion.
Moving on to Global cigarettes. With joint growth in export and subsidiary volumes, total global cigarette volumes gained by 20.1% to KRW 14.82 billion. Thanks to the volume growth, revenue also grew 26.3% year-over-year to KRW 321.6 billion. Export revenues benefited by stronger contribution from high ASP markets in revenue along with effects from pricing to show a revenue growth more robust than volume growth, rising by 38.8% to KRW 173.3 billion. Our subsidiaries as expansion of distribution coverage in major markets, including Russia and Indonesia led to volume growth and with pricing strategies, adding to the increase, revenues grew by 14.3% to KRW 148.3 billion.
Next, on NGP. Total NGP stick volumes climbed to 3.48 billion sticks, which is an 18.2% increase than the previous year. Domestic NGP revenues saw a surge in sales driven by an expanding market by 12.5% to KRW 135.9 billion. However, global NGP revenues were still impacted by unfavorable comparison to the high volume of devices in the previous year during the supply chain disruption, seeing a Y-o-Y decline. And overall NGP revenue for the quarter was down by 16.1% to KRW 194.8 billion. Allow me to elaborate further on the domestic and international GP numbers.
Domestically, the market penetration of NGP continued in the quarter with higher demand for the category, and Q3 penetration rate was up 2.3 percentage points at 19%. Q3 KT&G's stick market share was 45.9%, maintaining leadership in the market despite more product launches and aggressive marketing activities by competitors. For global NGP as consumer base expands within launched markets, stick volumes grew 22.2% year-over-year. We expect global market penetration to expand even further going forward as well as improvements to profitability driven by higher contribution of sticks in the revenue mix.
Moving on to Health Functional Food. In HFF revenues for the quarter, on top of the recovering duty-free sales, we saw stronger revenues from China and the U.S., but this was more than offset by a stagnant domestic HFF market, leading to lower revenues for Korea and reduced revenues in other markets, totaling to a 8.2% decline Y-o-Y in revenue to KRW 418.2 billion. And the bottom line, as we expand marketing investment for the global market, mainly in China and the U.S., profits were down 14.5% Y-o-Y to KRW 60.7 billion. Looking at some numbers for domestic and global revenue.
In the domestic business, this increase in and outbound tourists and partial recovery of Chinese tourist demand indirect channel revenues that include duty-free saw an increase, while lower level of disposable income due to inflation and changes to purchasing behavior for the holidays continue to suppress market demand, leading to a drop in our domestic revenue by 6.5% at KRW 349.9 billion. In the global business, as our focus on online-based marketing bears fruit in core markets, China and U.S. revenues grew while revenues in other offline-based markets like Japan and Taiwan drove down overall revenue.
Lastly, on our real estate business. Our Q3 real estate top line benefited from higher revenue recognized from DNC Dogan, leading to growth in subsidiary revenue, which was supported by additional revenues from development projects on properties in greater Seoul, leading to 40.3% higher top line of KRW 224.9 billion. In operating profit, the unfavorable comparison to last year due to completion of [ Sun and Guaco Hong Sung PFP ] project was more than offset by higher profit contribution from new projects, including DNC Dogan, with a 10.4% growth in operating profit reaching KRW 76.3 billion.
With that, we will conclude the presentation for KT&G's third quarter earnings and allow me to introduce the fact that we will be hosting a value day on the 13th of November. In this event, we will be announcing our mid to long-term shareholder return plans and our strategies going forward. And as well as this conference call, it will be hosted in a conference call and webcasting. We ask for your participation. We will move on to Q&A.
[Operator Instructions] The first question will be presented by [ Chung Kim ] from Merit Securities.
[Interpreted] Thank you very much for taking my question. I would like to ask you 3 questions. The first one has to do with your tobacco business. I think that we are seeing some improvement in profitability as we come into the second half of the year. Other than the duty-free channel, would like to understand as to what drivers existed that actually brought about that improvement? And also in light of the current cost base regarding the tobacco leaf, what is your projection in terms of your tobacco business profitability for the first half of next year? Because I think there is some room for us to be a little positive in terms of the future trend.
Second question relates to your Regence business. With the resumption of the Chinese group tourists inbound tourists, I think we can expect to see some improvement from the fourth quarter although this business had been a bit slow up until the third quarter. What do you think are some of the levers? And do you see any signs of such levers bringing that improvement? Third question has to do with your real estate business. With the completion at the end of the Suan development project, I would like to understand what your forecast is in terms of the revenue as well as profit from your real estate business going forward.
[Interpreted] I am [indiscernible], Chief of Marketing. Responding to your question with regards to other than the duty-free channel, what were the key drivers behind our business? And also, you asked about the outlook that we have for next year's top line going forward. So aside from a duty-free impact, in the third quarter, we launched a new product into the market, which was quite a bit of a success. As a result, we were able to achieve a record high market share of 66.8%, which was the highest since 2008. I believe that to be the key driver behind the good performance that we have seen. I believe that come next year, there will still be elevated level of inflation, which will squeeze our bottom-line profitability. But as a company, we will focus on high-margin channels as well as high ASP products so that we can maximize the profitability. So in that sense, we do take on a quite positive view for the future.
[Interpreted] I am Kyung Man Bang, Chief of Strategy at KT&G. Responding to your question about the Jensen business, in terms of the increase in the inbound travelers as well as increase the group travelers and individual FITs, we have seen increase on a Y-o-Y basis of 57.5%. But in terms of the number of Chinese tourists that have visited Korea, compared to the figure of 2019 September, it was only about 49%, so not as efficient as before. And so up until the third quarter, the impact from the allowance of the group tourist into the Korean market had not been that significant. But we believe that starting in the fourth quarter, we will start to see some gradual improvement.
And as a result, we are expecting an upward trend in top line revenue, but still, we are mindful of the fact that this market has quite a bit of volatility. So we have different scenarios in place which we will flexibly use to respond to the market trend. And also ahead of potential large-scale inflow of Chinese group tourists. We will expand on the dedicated or special products for this group of tourists and also facilitate on the promotion activities and campaign and make sure that we have ample amount of inventory for major products. So we will take on a very nimble approach in responding to the market trend. And we'll continuously focus on this segment of the market, especially on the online as well.
[Foreign Language]
[Interpreted] I am [indiscernible], Chief of Real Estate. Responding to your question about our real estate business. I am fully aware that there could be some concerns of our revenue and operating profit going forward for '24 and '25. In light of the current sluggish real estate market as well as the fact that we have completed our Suan development project. But at the company in order for us to minimize the risk in terms of the structured investment for PFE and SBCs, we have increased our equity investment into these vehicles. And we will accelerate the development of the sites that are located at Anyang and Cheonan so that we can drive further performance. So despite the difficult headwinds that exist in the market, I can assure you that you can trust in us and look forward to a good performance in the future.
[Interpreted] The following question will be presented by Hyeeun Kim from Morgan Stanley.
[Interpreted] Thank you. I would like to ask 3 questions. The first one has to do with your cigarette exports, the Q3 numbers are quite positive. And if you look at the geographical and regional split, we see particularly the numbers from Middle East is really good. Could you explain as to the reason behind that in terms of both volume and the overall export value? I see that the figures are very good. Do you think that you will be able to sustain this trend going forward? Also since you have very positive volume and ASP figures, can you provide us with a color as to what the amount of profitability impact in turns quantitatively, can you share with us a specific figure?
Second question is your domestic NGP business. Your market share seems to be a bit weak like to understand since you have the HYBRID 3.0 platform that you have launched, do you have any particular strategies to help you overcome the current situation in terms of domestic market share? The third question has to do with your NGP Global business. The revenue that we see from this business is not all that positive. Do you have plans to add on new markets or countries or launch new products?
[Interpreted] I am [indiscernible], Chief of Global Business. Regarding the Middle Eastern market last year, we introduced and launched new product, and we also focused our marketing efforts on the fast-moving products, which actually drove up the actual sales of these products and also drove a very positive export-related performance. Also, we've been able to grow the total volume, the sales volume, thanks to the effort as well as through our channel store business. And we were able to also increase the pricing, which helped with the year-over-year growth in terms of revenue and operating profit.
In terms of the overall sales volume itself, we've been continuously expanding our distribution coverage and have been sensing the market continuously to have a feel for where the market is. And if we consider a certain market to be quite stable, we went ahead and started increasing the ASP, the pricing. Also on the brand side, we've introduced a very differentiated and special product for the market, which has high ASP, which once again established a basis for us to grow the number of units sold as well as profitability. So I can tell you that there are different levers, including pricing, distribution coverage and advertisement coverage as well as new product launch, which will have a cumulative effect in helping us further drive up growth and hence, we expect the growth to continue into the future.
[Foreign Language]
[Interpreted] Hello. I am Lim Wang Seop, Chief of NGP. Responding to your question regarding the competitive landscape within the Korean market, you are right, for the past 3 to 4 years, we did not see our competitors come out with new platforms or new devices. But then most recently, our competitors introduced Iluma and Glo Hyper, which actually depend the competition. And so with the coming of these 2 products from our competitors, they started on with a very strong promotion, which further heightens the overall level of competition in the market. We have also launched a lil HYBRID 3.0 and [indiscernible], and we believe that the launching had a very positive impact and driving our performance.
In terms of the upcoming and new devices and the other models, you mentioned that we may be a little slow compared to our peers, but we can tell you that at this point, we are developing a differentiated, more up-to-date follow-on model, and we will be able to introduce that next year. Then we will be able to create a turnaround or a rebound momentum.
Second point I want to talk about is the impact of the device revenue. We've actually pulled forward the sales of the device revenue, and we've incurred early sales, and that had quite a bit of impact for us this year. And we think that, that impact will linger until the end of this year. So starting next year, we have decided to seek and employ a different approach. So at the beginning of the year, we will be adding new markets so that we can further expand the demand. And at this point, we are not in the duty-free channel. So we are considering entering into the duty-free channel as well. The second point regarding that is that our mainstream product or key product is a lil SOLID 2.0. But in order to further expand our market base, we're considering a one notch lower brand. And at this point, we have a lil SOLID EV model, which is sold in 17 countries, and our plan is to further penetrate the market with that model. And also the lil HYBRID 3.0 and as well as the upcoming the next follow-on platform, we expect will have a positive impact, especially for next year's performance.
[Interpreted] The following question will be presented by [ Sung Jong ] Park from Kim Securities.
[Interpreted] I have 3 questions. First one is, if you look at the movement analysis of your operating profit, cost variance is KRW 74.3 billion for the third quarter. If you look at Q1 and Q2 number, that extent is about KRW 50 billion. So it seems like the cost burden has grown. Is it mainly because of the higher cost base for the raw materials? Or are there any other reasons? And if that is the case, do we have to expect a bigger amount of cost burden for you in 2024 versus '23? And second, with the resumption of the overseas travelers, overseas traveling, it seems like your duty-free revenue performances are improving. But versus 2019 revenue in terms of compared to your tobacco and HFF business performance, how much of an improvement are you seeing once again versus 2019 figures? Third question is your future upcoming platform following the e-cigarette platform, what is the concept or the plan that you have in terms of this future platform?
[Interpreted] This is the CFO, Kim [ Shinhan ]. Responding to your question about the cost. You asked about the variance in the cost level. Yes, there's been an increase in the year-over-year cost amount because of the higher amount of sales that we've been able to generate. So that was the one key reason. And the second has to do with the increase in the price of the raw materials. And as you know, our main raw material is the tobacco leaf and that pricing is determined by the international tobacco leaf market. And also we have secondary materials that we use, which is heavily impacted by the global inflation.
In terms of the tobacco leaf itself, if you look at '21 to '22, basically, there's been an increase in pricing. And as you know, there is a 1-year time lag for that to be actually reflected in our accounts. So that impact is now seen in 2023 numbers. So if we look out into 2024, the price fluctuation of tobacco leaf for 2023 is going to be reflected in '24 numbers. Currently, at this point, tobacco leaf production volume has increased compared to the past, but previous year because there was a low level of production, the prices have gone up.
And now there is an accumulated standby demand. So even if there is the growth in the overall tobacco leaf development production volume, it is considered to be not enough to actually satisfy that pent-up demand or the standby demand. And that is the reason why we think that for this year, the price was also continue to creep up. So the cost burden from the tobacco leaf amounts to about 15%. And so I believe that next year, we will still be exposed to that cost burden. And in terms of the secondary raw materials that are used, which is heavily impacted by inflation, currently, that inflation is being controlled to a certain extent.
So for the tobacco leaf impact, I think '24, we will continue to see that cost increase impact whereas for the other types of secondary raw materials, the impact in '24 numbers will be limited. So in terms of how we are responding to these increases in cost base, first one is that we are focusing on improving the efficiency of our manufacturing processes and also looking for and developing alternatives to tobacco leafs. And we've been doing this over this year, and we will continue to do that next year as well. Another approach is for us to target high-margin markets, we will continuously endeavor to make sure for us to secure a buffer so that we can protect ourselves from the increase in the cost and really protect and safeguard our bottom line.
[Foreign Language]
[Interpreted] Kyung Man Bang, Chief of Strategy at KGC. If you look at our duty-free channel, you can divide that into airport and downtown duty-free shops. Now airport revenue, basically, thanks to the growth in the Korean travelers, we've seen year-over-year growth, but the downtown duty freeze are mostly places where tour groups make the purchase. And it is from this channel that we've seen underperformance in terms of results. The reason is because of the changing trend in terms of how people go on a trip these days, the trend is FIT tourists rather than a group tour. And hence, we've seen the performance in sales from downtown duty-free shops actually declined. So we're very closely monitoring these changes.
Now for the inbound Chinese group tourists, we are running a promotion to target the guides of these tour groups and also linking up with different Chinese-based tour applications and tourist agencies so that we could actually leverage that opportunity for us to further activate our sales. And because duty-free channel is a high-margin channel, eventually, that will have a positive impact on driving up our operating profit.
[Interpreted] This is Park [indiscernible], Chief of Marketing. Regarding your question about domestic cigarette business, on the DFS channel, as we've seen increases in the inbound and outbound tourists, we've seen some support for the DFS channel itself. But as mentioned by the previous speaker, we are seeing also changes and differences in the trend of people taking on a trip. So there is still an element of uncertainty in this market. So we think that we will be able to achieve about 60% to 70% of the performance that we used to record pre-COVID period. In terms of the DFS market segment, we were set up of a portfolio of products that best fit the needs of the buyers at the DFS channel, and we'll be releasing and launching brands that best fit that requirement.
[Foreign Language]
[Interpreted] This is Lim Wang Seop, Chief of NGP business. You asked about the future platform that will follow our e-cigarette business. And I'm sure you could appreciate that I could only be talking about at the concept level. We are clearly developing various different platforms for us as NGP is our future growth engine. There are various different platforms that is currently under development, which certain platforms are targeting the domestic market and certain other platforms targeting the global market. In this process, we will incorporate the demand and needs of domestic consumers and users as well as the overseas trend as well and also consider the overall competitive landscape, and we decide as to which platform to take into which market. That will be the basis upon which we create and configure portfolio of the platforms.
[Interpreted] The following question will be presented by [ Sanjeev ] from CLSA.
[Interpreted] Thank you for taking my question. My first question is that I am a bit concerned that your domestic CC share is going down. Unlike your competitors like BAT, they've been very continuously releasing and introducing new products. They make their products more slim, lighter and lower priced, which help them gain market share. And PMI also introduced Iluma, You, of course, introduced HYBRID 3.0 into the market. So can you provide us with more specific in terms of the market share number based off of the number of devices?
I would like to know what the market share looks like after the Iluma launch, following the Iluma launch and what the market share looks like following the HYBRID 3.0 release on a monthly basis. Your CC export numbers are really good. I think you were able to increase the pricing because of the increase in the tobacco leaf, the raw material cost. But I think in the future, you may meet with some resistance. There could be some market resistance on further pricing increase. So can you provide us as to whether what your take is in terms of possible price hikes in the future? And third question has to do with your message about expanding your distribution. Can you explain as to what that specifically means so that we could help determine whether that approach is sustainable?
[Interpreted] I am Chief of NGP, Lim Wang Seop. Regarding that market share based on the device. As you know, there's been some indiscriminate discount, practice of discounting in the market, like 3, 4 years ago, you would know that, that had happened. And when we released our own platform, we actually did not provide or give any discounts. And when we don't give -- even if with no discounts, we were able to sustain our market share of 80% to 85%. And then the competitors came out with their new platforms, and they gave a huge amount of discount, which then will impact our market share. And sometimes it will go down to as low as 60%. And if the competitors gave less of a discount, then we would be able to recover our MS to about 75% to 80%. So I have to admit that we are supposed to be discount intensity of our competitors. That does impact our market share. But I can tell you that if we have a competitive edge in the devices that we offer, we will be able to offset that impact and be able to beat the market.
[Interpreted] I am [indiscernible], Chief of Global business. Responding to your question about a possibility of a price hike in the future. If you look at the competitors, they also make a decision in terms of the movement in the pricing, depending on whether they want to make an investment or whether they want to harvest that investment from the market. And competitors are also increasing the price point because they are also exposed to the same increase in the cost base as we are. So that's one aspect. And the other aspect is in terms of the brand, if you are a company able to very quickly develop and launch a certain products that best meet the market need and the trend, I believe that is where your competitive edge lies. And in terms of our marketing capabilities, we are very quick in coming up with the products that the market really require. So I think, hence, from that perspective, there is room for us to actually drive up the pricing in the future a couple more times.
Second, regarding your question about what expansion of distribution, all means. If you look at the distribution channels, we can think about the retail as well as the channel stores and CVS, the so-called key account channels. So that is the distribution coverage. And when I talk about advertisement coverage, it's about having our products being displayed on the shelves and locations like at CVS. So it's all about providing convenience of purchase to our user base and being able to leverage off of certain locations to really advertise our products. And that is going to build up and have an impact on the overall performance. So basically, it's about increasing the number of retail stores through which we sell our products and also increasing the number of sites, whether where we could advertise the products.
[Interpreted] Thank you very much. This brings us to the end of the third quarter 2023 earnings presentation of KT&G. Thank you once again for joining us. And if you have any further questions, feel free 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.]