Suntory Beverage & Food Ltd

TSE:2587

Earnings Call Transcript 2019-Q1

[Takayuki Sanno, executive]

This is Takayuki Sanno. Now I would like to review the financial results of the first quarter of FY 2019.

Revenue was JPY 285.7 billion, up 3.1% year-on-year and up 4.4% on a currency-neutral basis. Operating income was JPY 17.8 billion, down 33.1% due to the JPY 11.6 billion gain on sale of food and instant coffee business in 2018. When excluding factors as such, operating income on an organic basis increased by JPY 18.0 billion, up 16.8% and up 19.3% on a currency-neutral basis.

Quarterly profit attributable to owners of the company was JPY 10.7 billion, down 47.7% year-on-year due to factors such as nontaxable gain on sale of food and instant coffee business in 2018.

As we explained in the full year earnings release in February, we are pursuing the structural reform, including reconstruction of profit generation force. However, the business environment surrounding us continues to be challenging, and the peak season, the second and third quarter, will be the crucial period for us. In order to achieve the full year forecasts, we will steadily address challenges facing us.

Please turn to Page 3, revenue and profit by segment. I will go over each segment in detail on the following pages.

Please turn to Page 4. First, Japan. Sales volume increased 2% due to continued good performance of core brands such as Suntory Tennensui and BOSS, outperforming the volume growth of overall beverage market, which is estimated to remain unchanged from the previous year.

Revenue was JPY 150.7 billion, up 0.2% year-on-year due to the deterioration of channel and size mix. Although the trend of FOSHU drinks and foods with function claims category recovered, it was lower than the overall average growth.

Segment profit increased 24.8% year-on-year. As a result of strengthening highly profitable products since last year, negative impacts of the product mix diminished with improved volume decrease rates in Tokucha and canned coffee BOSS. In addition, as a result of continuous cost-saving activities, gross profit was roughly the same as the previous year. Furthermore, shifting marketing investment to the second quarter or later also contributed to the profit growth. However, segment profit was roughly the same as the previous year when the timing shift of brand investment was excluded.

Please turn to Page 5. Now I would like to explain the progress of midterm structural reform in Japan. First, establish a high added-value and profitability business model. We are particularly strengthening Tokucha by introducing Tokucha Program to support overall health promotion of users. As a result, Tokucha is on a recovery trend with 3% volume decrease year-on-year, which is an improvement compared to approximately 20% decrease in the same quarter last year. We renewed Tokucha on April 2 followed by the launch of a new food with functional claims, Iyemon Plus for Cholesterol Control, on May 7. Thus, we will stay aggressive in our activities.

Next, SCM structural innovation. Constructions to expand production capacity are underway in Ujigawa and Haruna plants and the fourth water source for Suntory Tennensui in Omachi City, Nagano prefecture. Please note that these will primarily start to contribute to the business performance next year onwards.

For this year, we are making progress to reduce the risk of unexpected costs through cost-saving activities such as weight reduction of Craft BOSS PET bottles and enhancements of supply capacity in the peak season such as securing logistics capacity.

Finally, reforms of the vending machine business structure. We are taking actions to improve sales trends and reduce operation costs amid the challenging business environment, but it is likely to take some time before we begin to see positive outcomes.

On top of these actions, as of May 1, we raised the prices for certain products. A number of customer negotiations resulted in agreement, but it is difficult to estimate the actual effects on the business performance at this moment in time because it depends on factors such as changes in sales volume following the price hike.

Please turn to Page 6. Next, Europe. Revenue decreased 1.3% on a currency-neutral basis due to the continued weak performance in Spain. Segment profit increased 13.2% on a currency-neutral basis due to factors such as the shift of sales promotion and advertising costs in France and the U.K. to the second quarter or later.

In France, May Tea, along with the core brand Orangina, grew despite slightly declining market, but Oasis performed less than the previous year, resulting in decreased revenue.

In the U.K., Lucozade Energy continued to grow, resulting in increased revenue on a currency-neutral basis.

In Spain, amid the decline of the on-premise market, especially tonic category declined. The core brand Schweppes continued to struggle in such an environment, leading to tough results. The new leadership has been carrying out portfolio reviews and sales force reforms, but it is going to take some time before such initiatives get on track and contribute to the performance recovery.

Please turn to Page 7. Next, Asia. Revenue increased 25.8% on a currency-neutral basis due to continued good performance of the beverage business. Beverage business in Thailand started operations in March last year. When results of January and February are excluded, revenue growth rate was over 10%.

Segment profit on an organic basis, excluding the impact of the gain on sale of food and instant coffee business in 2018, increased 18.4% on a currency-neutral basis. Similarly, profit growth rate was in the mid-single digit when the impact of beverage business in Thailand was excluded.

Beverage business in Vietnam continued to perform well, bringing 18.9% growth in revenue. In Thailand, the core brand Pepsi and other products did well with a tailwind of beverage market recovery. goodmood, a well-received product in Indonesia, was launched in Thailand in February followed by Vietnam in April as part of actions initiated to establish multinational brands in Asia.

Health supplement business resulted in revenue decrease as Essence of Chicken struggled not only in Thailand but also in emerging countries such as Myanmar, which used to underpin the growth.

Please turn to Page 8. Lastly, Oceania and Americas. In Oceania, revenue of the fresh coffee business increased on a currency-neutral basis. Meanwhile, Frucor Suntory shifted activities for Easter to the second quarter. As a result, Oceania as a whole resulted in a slight revenue increase, 1.4%, and a slight profit decrease year-on-year on a currency-neutral basis.

In Americas, revenue increased due to the recovery of Pepsi brand, the growth of noncarbonated category and the successful price increase implemented in the second half of last year. Profit was slightly down from the previous year due to factors such as high costs of raw materials.

With that, I would like to conclude my explanation on each segment. Not only Japan but many regions are moving into a peak season soon. We will stay focused to achieve the full year forecasts by making steady progress in the structural reform and by generating stable results in the coming peak season.

That is all from me. Thank you.

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