Suntory Beverage & Food Ltd

TSE:2587

Earnings Call Transcript 2019-Q2

[Kazuhiro Saito, executive]

This is Kazuhiro Saito. Now I would like to review the first half of FY 2019. Revenue was JPY 627.8 billion, up 2.3% year-on-year and up 3.6% on a currency-neutral basis. Operating income was JPY 50.9 billion, down 9.7% due to the JPY 12 billion gain on sale of food and instant coffee business in 2018. When excluding factors such as these, operating income on an organic basis was JPY 51.5 billion, up 14.3% and up 16.2% on a currency-neutral basis. Quarterly profit attributable to owners of the company was JPY 31.8 billion down 23.1% year-on-year due to factors such as nontaxable gain on sale of food and instant coffee business in 2018. Although, situations differ from region to region, overall results of the first half were within the anticipated range as we are making progress in sustainable sales growth and profitability enhancement through structural reform in each region. Having said that, structural reform is still halfway through and there are remaining challenges to be addressed. We will continue pushing it forward in a firm manner. The dividends for the first half are JPY 39, same as last year. There are no changes to the 2019 full year forecast announced on February 14. In Japan, the prolonged rainy season and other factors led to a very tough start of the second half, but we will carry out the solid management activities in the coming peak season in pursuit of improvement of the full year performance. It has been 4 months since I was appointed as CEO. Taking this opportunity, I would like to talk about the areas I am putting emphasis on. We have excellent talent resources and know-how across the world. A typical example I would like to highlight based on my experience abroad is outstanding brand-building capability and R&D in Japan. Meanwhile, Asia, where I was previously based in, has fewer analogue legacies than Japan and is rapidly digitalizing with underlying government initiatives. And we have a lot to learn from Asia. In order to share and incorporate each other's know-how from different parts of the world in a flexible manner, I am stressing on 3 Fs, namely, flat, flexible and frank in each part of the company. The ultimate goal is flexible adaptation to changes through establishing a flat and swift decision-making structure. In order to facilitate that, we need to improve frank communication among each other. I am convinced that these 3 Fs are essential for our speedy growth down the road. The business environment around the world is changing at an increasingly accelerated pace. We will stay focused as we run the business with the mindset to keep ahead of the curve and the spirit to actively bring changes to the world.

That is all from me.

[Takayuki Sanno, executive]

This is Takayuki Sanno. I would like to review the first half of FY 2019 in more detail. Revenue and profit by segment. Revenue grew in all segments except for slight decrease in Europe year-on-year on a currency-neutral basis. Asia particularly continued to grow significantly. Overall segment profit increased in double digits on an organic basis led by Japan and Asia. I will go over each segment in detail on the following pages. First, Japan. Sales volume increased 0.6% due to continued good performance of products such as BOSS and Green DAKARA, outperforming the volume growth of overall beverage market, which is estimated to be about negative 1%. Revenue was JPY 336.0 billion, up 0.7% year-on-year with factors such as continuous sales trend improvement of FOSHU drinks and foods with function claims and the price increase implemented for large formats.

During the April to June period, revenue grew 1.1%, despite 0.5% down in sales volume which means that the unit price is on a recovery trend. Segment profit was up 19.9% due to increased revenue and other factors, including continued emphasis on cost-saving activities amid deteriorating currency and market prices for raw materials and decreased sales promotion and advertising costs in the first half compared to last year as a result of expenditure timing review to align with new product launch and brand development timings. In our midterm structural reform, established a high-added value and profitability business model and SCM structural innovation are making steady progress. Regarding reform of the vending machine business structure, the business was held at a slight decrease year-on-year with our efforts, including the introduction of exclusive products for vending machines, while the vending machine market is estimated to have shrunk by 2%. On the other hand, it'll take some more time before we see positive results of operation cost saving but we will continue our efforts in a steady manner. Next, Europe. From here on, all the growth rates I present are on a currency-neutral basis. While the U.K. performed well revenue decreased 2.0% due to revenue declines in France and Spain. On the other hand, segment profit increased 2.5% due to the sales growth in the U.K. and the progress of cost-saving activities and the timing shift of part of sales promotion and advertising costs in France and Spain. France was hit by the coldest weather in 40 years in May and the bad weather led to market deterioration. In such a situation, our core brand Oasis faced difficulties resulting in 5.8% decrease in revenue. In July, the weather was favorable. We are pursuing sales trend recovery through our focused efforts in activities for core brands such as Oasis. In the U.K., our revenue was up 4.3% as a result of continued growth of Lucozade Energy, while estimated volume growth of the market year-to-date in May is flat year-on-year. In Spain, although, we reinforced activities for the off-premise channel, revenue decreased 4.9% as we faced difficulties amid the continued sluggishness of the on-premise market, including the tonic category.

We have been carrying out portfolio reviews and sales force reforms, but it is going to take some time before we come back on track. Next, Asia. Revenue was up 19.9% as a result of continued significant growth of the beverage business. Segment profit was up 29.5% on an organic basis. When January and February results from Thailand are excluded from the Asia total, revenue grew in mid-10% to 20% range and segment profit grew by approximately 20% year-on-year. In Vietnam, estimated volume growth of the market stands at near 10%, while our revenue was up 17% as a result of continued growth of core brands, including the energy drink Sting and the RTD tea, TEA+.

Thai market also is estimated to have expanded volume by more than 10% with a tailwind of events, such as the general election in March and measures to buoy up the economy implemented by the government. In such market condition, our core products, including Pepsi, performed well, resulting in approximately 40% revenue growth year-on-year in the 4-months period from March through June. Meanwhile, the health supplement business decreased its revenue by 6.7%, as not only Essence of Chicken, but also Bird's Nest faced difficulties in intensifying competition in the core market, Thailand.

Fundamental structural reform is already underway. And actions including reviews on distribution strategy are being carried out by the new leadership. Although Asia is performing well for the time being, introduction and incremental raise of sugar tax are scheduled in Malaysia and Thailand from July and October, respectively. In addition, there is the volatility typical to emerging markets. We will continue to speedily respond to situational changes. Lastly, Oceania and Americas. In Oceania, revenue from both Frucor Suntory and the fresh coffee business increased while segment profit decreased due to the changes in the timing for sales promotion and advertising costs. In Americas, revenue grew as our strong trend continued, while segment profit was slightly down due to high raw materials costs. With that, I'd like to conclude my explanation on each segment. We will stay focused to achieve the full year forecast by making steady progress in structural reform in each region through the second half and by generating firm results in the peak season.

That is all from me.