Kirin Holdings Co Ltd

TSE:2503

Earnings Call Transcript 2019-Q2

[Yoshinori Isozaki, executive]

Good morning, everyone. My name is Isozaki, President and CEO of Kirin Holdings. Thank you for your continued purchase and use of the Kirin Group's products and for your continued support and understanding of the company's operating activities.

Today, I would like to give you an overview of the company's financial results for the first half of fiscal year 2019 and discuss our current challenges and future directions. I would like to start with a review of the company's basic policies. As you are aware, January of this year marked the start of the 2019 medium-term business plan. We are currently focusing on 3 important challenges to achieve future sustainable growth under the theme of Shifting Gear from Revitalization to Growth. In particular, we considered cash generation at existing businesses to be the base of future growth. We gave maximum priority to this challenge during the first half and were able to deliver positive results.

Over the past 6 months, we were also able to make significant progress when it comes to new businesses bridging Pharmaceuticals and Food & Beverages with an eye towards the future. In order to continue meeting investors' expectations, we will continue the steady implementation of the medium-term business plan. Today, I will first be going over the status of our existing businesses to then discuss the equity and business alliance with the FANCL Corporation, as announced yesterday.

Regarding our existing businesses, I would like to start with Kirin Brewery. Continuing our strategy from last year, we carried out the selective focused allocation of resources towards growing brands and realized sustainable growth in revenue and profit without relying exclusively on new launches and extensions. As a result of this, sales volume for our beer products grew by approximately 2% in the first half of the year, while the overall beer market shrank by approximately 1%.

On a brand-by-brand basis, we saw very robust demand for Honkirin, which was launched last year. Despite the sequential emergence of a number of competing products, we were successful in growing sales volume year-over-year. The philosophy of nurturing new products has become deeply established within the company, leading to a steady improvement in our marketing abilities. Also, in the category of beer, while the full-malt beer category market shrank by 4%, Kirin Ichiban canned beer registered year-over-year sales volume growth. We believe the renewal of Kirin Ichiban, which we carried out in April, made a contribution to this increase.

On the other hand, there has recently been an increase in demand for products in lower-price categories. We will be adapting in a rapid and flexible way to changing consumption habits and aim for a further profit expansion through the implementation of the company's mid to long-term strategy, which takes into account the liquor tax revision. In concrete terms, we will steadily increase sales volume in new genre products for which we expect firm demand will persist. As you are aware, new genre products are only for off-premise use. As a result, this product category has good sales promotion expenses efficiency. And combining marginal profits with fixed sales promotion expenses yields bottom line profits at a level similar to beer. We believe this presents an opportunity to expand profits even further.

Additionally, we carried out efforts towards improving the medium-term brand mix. In particular, the beer market for restaurants and bars on-premise is in a depressed state. However, sales volume and the composition ratio for craft beer continues on a steady upward trajectory and thus continues to transform into an increasingly attractive market. We would like to raise market awareness of craft beer through the drinking experience when eating out and increase sales volume for craft beer both for on-premise and for the market as a whole. However, we expect the domestic beer market to continue shrinking over the long term. By increasing sales volume for growing brand, we hope to contain an increase in fixed manufacturing costs and seek the optimization of sales promotion expenses.

Additionally, we continue boosting our market cost efficiency by taking focused measures to enhance brand equity. For example, in the renewal process for Kirin Ichiban, we carried out measures linking digital marketing to in-store marketing, where customers purchase our products. As a result of this strategy, we were successful in expanding our reach to consumers in their 20s, in addition to our primary demographic of 40- and 50-year-olds. This type of initiative allowed us to deliver year-over-year normalized operating profit margin growth during the first half. Going forward, we will continue our efforts towards the early achievement of a normalized operating profit margin of 25%.

Next I would like to discuss the Lion Beer, Spirits and Wine business as sales volume decrease of approximately 3% for the 12 months through the end of June. However, our focus on higher-price growth categories allowed us to stay above a greater revenue decline. Consequently, revenue was down only 0.7% year-over-year. Going forward, we expect the continuation of this trend, characterized by a slight sales volume decrease in the Australian market. We will continue our efforts towards improving our price and brand mix.

Furthermore, sales volume declined by approximately 9% in the first half as a result of the sales promotion strategy we carried out at the end of fiscal year 2018. We have lowered the full year revenue forecast to reflect this fact. However, we will be aiming to achieve the original normalized operating profit forecast by implementing further cost-reduction measures. Furthermore, we continue negotiations towards the sale of the Lion Dairy and Drinks business.

Next, I would like to discuss our results at Kirin Beverage. We registered both revenue and profit growth year-over-year in the first half and took steady steps towards realizing our goal, which is to generate profit based on growth. We focused investment on core brands and zero-sugar brands, a growth domain, in accordance to our original basic strategy. As a result of this, we were able to surpass the sales volume forecast for small PET bottle products. We were also able to deliver a normalized operating profit margin of 8.2%. On a brand-by-brand basis, sales increased driven by Gogo-no-Kocha amidst the backdrop of market expansion. In particular, we saw a significant sales increase in the zero- and low-sugar categories.

We registered strong sales associated with ONEDAY BLACK, which was launched in April as part of the Fire brand. The Fire brand as a whole achieved a year-over-year sales volume increase for the 3-month period between April and June. On the other hand, going forward, we will be restraining the allocation of marketing costs for canned products, sales for which continue on a downward trend. We believe the Fire brand will continue being a revenue pillar. However, we will be carrying out brand management, giving more weight to higher investment efficiency.

In addition to this, the price revision for large PET bottle products is proceeding as planned. Going forward, we want to grow the sales volume for small PET bottle products through brand enhancement. We also want to achieve marketing cost efficiency and cost reduction, including through alliances. We will be aiming towards a normalized operating profit margin of 10% through these initiatives.

Next, I would like to discuss Myanmar Brewery, which delivered a very strong performance. By enhancing brand equity with a focus on Myanmar beer targeting the mainstream market and Andaman Gold targeting the economy market and by increasing our production capacity, we succeeded in capturing market growth and greatly increased sales volume. We will aim to deliver top line growth while maintaining a high level of profitability. This concludes our review of the food business domain.

Next, Kyowa Kirin in the Pharmaceuticals business domain has grown to become a medium-term growth driver and drive growth for the Kirin Group as a whole. Global strategic products Crysvita and Poteligeo are steadily achieving market penetration in the North American and European markets. Additionally, our reapplication for KW-6002, a therapeutic agent used in the treatment of Parkinson's disease, was accepted by the FDA. And development continues smoothly towards market deployment.

This concludes the overview of the progress made in existing businesses during the first half and of the current challenges facing the Kirin Group.

Lastly, I would like to discuss the progress in the new businesses bridging Pharmaceuticals and Food & Beverages. As you are aware, after reorganization, Kyowa Hakko Bio became a direct subsidiary of Kirin Holdings in April of this year. We are currently exploring ways to fully utilize Kyowa Hakko Bio's high-function amino acids and substances with function claims pertaining to immunology into the brain as well as their customer data in a B2C initiative. In order to increase the accuracy and speed of these initiatives even further, we have entered an equity and business alliance with the FANCL Corporation as announced yesterday.

As you are aware, FANCL was founded in 1980. It answered the needs of consumers suffering from skin problems caused by cosmetics and became the first company in the world to offer preservative-free cosmetics. Additionally, starting in 1994, it became the first company in Japan to offer health foods with scientifically proven benefits as supplements. The company is currently striving to offer a solution to the important social issue of extending people's healthy lifespan. As a result, FANCL's corporate philosophy and direction match perfectly with the Kirin Group, which tackles disease prevention and attempts to solve social issues in the health and well-being domain. Furthermore, there is little overlap between both companies in terms of substances, products and sales channels. So we believe we can leverage both companies' respective strengths in a strategic manner. Going forward, we want to unlock synergies in a wide range of fields and are confident we can solve a greater number of social issues while realizing growth for both companies. We believe stakeholders have reason to be hopeful about this alliance.

This concludes my progress review for the first half and an overview of initiatives towards future directions. Going forward, we will continue to give maximum priority to profit growth of existing businesses and start by first meeting the target profit of the year. Thank you for listening.

[Noriya Yokota, executive]

I would like to discuss the company's financial results overview for the first half of fiscal year 2019 as well as our full year forecast revision. Please turn to Page 17. We delivered an increase in both consolidated revenue and normalized operating profit during the first half. Profit before tax as well as profit attributable to owners of the company include the negative effects of a comparison with the second quarter of last fiscal year, in which we posted a gain on the sale of shares in one of our subsidiaries and the impairment loss associated with the Lion Dairy and Drinks business. However, these results are mostly in line with what we announced during the company's financial results briefing for the first quarter this year. Furthermore, this reduction is eligible for normalization, with normalized earnings per share as a dividend resource unchanged year-over-year.

Next, I would like to discuss changes in consolidated normalized operating profit by operating companies. As you can see from the slide, while we registered a decrease associated with the Lion Dairy and Drinks business, Kyowa Kirin delivered normalized operating profit growth and the Kirin Group delivered a solid performance overall. Strategic expenses, which are a part of corporate expenses, are currently slightly behind schedule compared to the plan. However, from the beginning, we have been putting emphasis on the second half. So they are broadly on track with the plan. For a more detailed information on the results for each operating company, please refer to the appendix starting on Page 23.

On Page 19, we divided the Kirin Group's performance for the first half into real gains and into impact of exchange. In addition to a strong performance of the domestic business, Myanmar Brewery and others in the overseas business delivered real gains. Excluding impact of exchange, normalized operating profit grew JPY 6.4 billion year-over-year and stood at JPY 92.9 billion. Weakness of the Australian dollar and the Myanmar kyat against the yen had a negative consolidated exchange impact of JPY 2 billion. However, real gains growth was enough to absorb this decrease and grow profit.

Please turn to Page 20. I would like to discuss the main point of the revisions to the consolidated full year forecast. While we lowered the normalized operating profit forecast for the Oceania Integrated Beverages business, including exchange impact, we also raised our forecast for Myanmar Brewery and CCNNE. For this reason, we maintain our original forecast in terms of the consolidated total, and we'll continue aiming for a target of JPY 190 billion. While an increase in other operating expenses led to a downward revision of our profit before tax forecast and profit attributable to owners of the company forecast, the normalized earnings per share estimate remains unchanged as does the dividend forecast. We expect to distribute JPY 63 per share to investors, up JPY 12 per share year-over-year.

Next, as Mr. Isozaki mentioned earlier, Kirin Holdings acquired a partial stake in FANCL Corporation stock. I would like to expand upon this acquisition's effects on the cash allocation policy, as shown in the medium-term business plan.

Please turn to Page 22. The cash allocation policy over the next 3 years, as announced in the medium-term business plan back in February, remains unchanged. As announced, we will be carrying out JPY 300 billion in growth investment. However, the JPY 129.3 billion associated with the acquisition is contributed as part of the amount stated in the medium-term business plan. This equity in business alliance centers mostly around new businesses bridging Pharmaceuticals and Food & Beverages.

However, the fact we were able to enter this alliance with FANCL, a company we have been interested in for a long time, in a speedy manner allowed us to realize this alliance in the most optimal way. We believe this alliance gave a more concrete form to the Kirin Group's mid- to long-term growth strategy within the scope of new businesses bridging Pharmaceuticals and Food & Beverages, as stated in Kirin Group Vision 2027. As mentioned previously, the JPY 300 billion in growth investment will not come from the accumulation of acquisitions and alliances but rather with generated operating cash flow as the main source of funds. For this reason, this alliance with FANCL does not represent an opportunity loss in terms of investment in existing businesses like the beer and spirits business or the nonalcoholic beverages business. Going forward, we will continue carrying out the growth strategy in growth markets with Southeast Asia at the core and also in the global beer market with craft beer as a pillar.

Needless to say, there is no change in course when it comes to the Kirin Group's consistent financial strategy of thorough disciplined investment decisions. We will continue to aim for the quantitative target of 10% or higher ROIC by the end of fiscal year 2021, as outlined in the medium-term business plan. Furthermore, we will continue to consider additional shareholder returns while monitoring not just the allocation to growth investments but also the status of asset sales and stock price trends. We believe stakeholders have reason to be hopeful about the future of the Kirin Group going forward.

This concludes my presentation. Thank you for listening.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]