Suntory Beverage & Food Ltd

TSE:2587

Earnings Call Transcript 2018-Q1

[Haruhisa Inada, executive]

This is Haruhisa Inada. I will explain the financial results of the first quarter of FY 2018. Compared to the previous year, revenue was JPY 277.1 billion, up 3.3%. Operating income was JPY 26.6 billion, up 27.0% and profit for the period attributable to owners of the company was JPY 20.5 billion, up 57.0%. Please note that the figures which are announced in these financial results are in IFRS.

In these 3 months, we faced challenges such as bad weather in Europe and in the Americas, but due to the gain on sale of the Food and Instant Coffee business, we were able to achieve increases in both revenue and profit.

Next, I will explain revenue and profit by segment. Both revenue and profit varied from segment to segment, but Asia became the main driver of the overall results.

First, I would explain about Japan. Revenue was JPY 150.5 billion, up 2.1% year-on-year. The market was forecasted to grow by 2% during January to March, but our sales volume increased by 3% as a result of our success in the strategy that we announced in the beginning of the year, which was to focus on water, coffee and sugar-free tea category. On the other hand, product mix was impacted due to sales decrease in FOSHU products. Also, costs incurred as a result of inventory building for preparation of the peak season. There was also cost increase from proactive marketing investment for future revenue growth. As a result, profit was JPY 5.2 billion, down 36.6% year-on-year. However, the main factors that impacted the profit decrease were within our expectation, and the results were within the projected range based on our annual forecast.

Next, I will explain the status of the focused categories in Japan. Regarding Suntory Tennensui, the core mineral water product performed well. In addition, the Suntory Okudaisen Blueberry Yogurina & Tennensui launched in March contributed to the category as well, leading the sales volume of the overall brand to increase 8% year-on-year.

For Boss, in addition to proactive marketing activities targeting existing core users of canned coffee, Craft BOSS, which was launched last year, is securing new coffee users and is performing well. This resulted the brand to increase its sales volume by 6% year-on-year.

For the sugar-free tea category, the content and package of Iyemon were renewed in March, and GREEN DAKARA Yasashii Mugicha grew significantly within the expanding barley tea market. In addition to Oolong Tea, the sugar-free tea category, as a whole, grew 3% year-on-year.

As a result of these activities, the sales volume for the first quarter outperformed market growth. We will continue to focus on water, coffee and sugar-free tea category by activities such as launching new products during and after the second quarter.

Next, Europe. In Europe, market slowed down due to extremely cold weather from the end of February to beginning of March, which impacted our results. In addition, Lucozade Energy in the U.K., which was changed to a low-sugar recipe, had a year-on-year decline. As a result, the segment profit was JPY 51.8 billion, down 3.1% year-on-year.

In France, the performance of some of the core brands had a year-on-year decline, but due to significant growth of MayTea, revenue resulted to be flat year-on-year. In the U.K., Lucozade Energy resulted in a decrease compared to the previous year In Spain, revenue decreased due to impacts from weather and increased competition.

Next, I will explain our initiatives for the low-sugar products in Europe.

First, regarding our low-sugar premium iced tea, MayTea. We have continued to implement proactive marketing activities for this brand in order to grow it into a product that will lead our portfolio transformation. This quarter, with the launch of new flavors in France as well as the growth of the RTD market, the brand performed very well. Also, as part of our challenge in new markets, we launched MayTea in Belgium in January and in Spain in March. We plan to also actively promote the brand in these countries in the future.

Next, about Lucozade Energy in the U.K. Our U.K. subsidiary, Lucozade Ribena Suntory, announced Health & Wellbeing Plan in 2016. According to this statement, our core product, Lucozade Energy, was changed to a low-sugar recipe. Since this change, the product continued to struggle into March this year, and Lucozade's index versus last year was 88% for January to March. The sugar tax was implemented in the U.K. on April 6, but some of the brands increased inventory to the distributors prior to the tax increase, making the retail price remain uncertain at this point, and the trend of the market and the consumers are yet to be determined. We will conduct proactive marketing activities to recover our sales.

Next, Asia. In Asia, in addition to the strong performance of the existing beverage business, the start of our joint venture with PepsiCo in Thailand resulted in revenue of JPY 44.3 billion, up 13.5% year-on-year. Also, with the gain on sale of our Food and Instant Coffee business, segment profit was JPY 17.5 billion, up 131.2%, a significant growth.

In Vietnam, revenue grew significantly with the strong performance of our core carbonated drink products. In the Health Supplement business, the temporary revenue increase of last year due to the change in distributor impacted the year-on-year sales decrease.

On March 5, Suntory PepsiCo Beverage Thailand began operations. This is a joint venture with PepsiCo, in which we own 51%. This news received much attention in Thailand and was reported by the local media.

We have another joint venture with PepsiCo in Vietnam as well. In Vietnam, we have steadily grown our business during the past 5 years since we started the joint venture. In Thailand, we will utilize the know-how that we have accumulated in Vietnam and aim to grow both revenue and profit based on strong distribution network of PepsiCo and by growing the noncarbonated business, which is Suntory's strength.

Lastly, Oceania and the Americas. In Oceania, Frucor Suntory has been recovering mainly around energy drinks. This has led revenue to surpass the previous year. Also, the fresh coffee business, which was transferred to Oceania from the beginning of the year, has been performing well resulting in increase in revenue and profit for all of Oceania.

In the Americas, the market decelerated due to bad weather, and competition continued to be tough. Although revenue decreased compared to the previous year, we were able to achieve an increase in profit as a result of further cost-management efforts.

This concludes my explanation of the financial results by each segment. As we enter our peak season, we will continue our activities based on the strategies that we announced in the beginning of the year and swiftly respond to any situation in each area to achieve our annual forecast.

That is all from me.