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Edited Transcript of 2587.T earnings conference call or presentation 5-Nov-19 7:00am GMT

Q3 2019 Suntory Beverage & Food Ltd Earnings Presentation

CHUO-KU TOKYO Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Suntory Beverage & Food Ltd earnings conference call or presentation Tuesday, November 5, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Takayuki Sanno

Suntory Beverage & Food Limited - Executive Officer

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Presentation

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Takayuki Sanno, Suntory Beverage & Food Limited - Executive Officer [1]

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This is Takayuki Sanno. I would like to review the third quarter of FY 2019.

Revenue was up 2.5% year-on-year on a currency-neutral basis and up 0.9% on a reporting basis.

Operating income, excluding the JPY 12 billion gain on the sale of our food and instant coffee business in 2018 and other nonrecurring factors, was JPY 91.2 billion, up 11.5% year-on-year on a currency-neutral basis and up 9% on a reporting basis. Operating income, including the nonrecurring factors, was JPY 90.6 billion, down 2.1% year-on-year on a currency-neutral basis and down 4% on a reporting basis.

Quarterly profit attributable to owners of the company was JPY 57.8 billion, down 10.5% year-on-year on a currency-neutral basis due to factors such as the nontaxable gain on the sale of our food and instant coffee business in 2018.

The beverage business in Asia performed well. Meanwhile, some areas, including Japan, were affected by bad weather, but overall performance was satisfactory. We can attribute the performance to the progress we have made in structural reform in each region, but it is still ongoing, and there are remaining challenges to be addressed. We will continue pushing forward with steady structural reform.

Please turn to Page 3, revenue and profit by segment. Revenue grew in all segments, except for a slight decrease in Japan and Europe year-on-year on a currency-neutral basis. In particular, Asia continued to grow significantly. Segment profit on an organic and currency-neutral basis grew in all regions, notably in Japan and Asia, achieving overall growth rate of double digits. I will go over each segment in detail on the following pages.

Please turn to Page 4. First, Japan. The rainy season ended about one month later than last year, resulting in an estimated volume decrease in the beverage market in July by 19%. Although a certain degree of recovery was observed in August and September, the market volume is estimated to have fallen by 4% in the July to September period, leading to a 3% fall in the first 9 months of the year. Given this context, our volume was down 5% in the July to September period and 2% in the first 9 months of the year.

Revenue was affected by the decreased sales volume, but was almost flat year-on-year, down only 0.3% due to factors such as continuous sales trend improvement of FOSHU drinks and Foods with Functional Claims as well as the price increase implemented for large formats.

In the July to September period, revenue decrease remained at 1.8%, despite 5% decrease in sales volume, which means that the unit price continues to be on a recovery trend. While revenue was almost flat year-on-year, segment profit was up 10.4% due to factors, including the progress we have made in our cost-saving efforts as part of the SCM activities and reductions in promotion and advertising costs compared to last year as a result of strategic reviews on expenditure timing.

Costs decreased compared to the July to September period last year when we had a temporary cost from the disrupted distribution caused by a series of natural disasters, but segment profit was flat year-on-year due to the significant revenue decrease caused by the bad weather.

In our mid-term structural reform, establish a high added value and profitable business model and SCM structural innovation are making steady progress.

Regarding reform of the vending machine business structure, the market, in general, continues to face a downward trend in sales and increase in operational and promotional costs. It will take more time, but we have been and will continue to be persistent in carrying out our structural reform.

Please turn to Page 5. Next, Europe. From here on, all the growth rates I present are on a currency-neutral basis. Revenue decreased 1.4% due to revenues falling in France and Spain, while the U.K. performed well. Segment profit increased 8.6% in Europe due to factors, such as sales growth in the U.K.; cost savings by SCM activities progress; and strategic marketing spend in France; and reduced costs as a result of lower commodity prices.

In France, revenue was down 3.8% as our core brand, Oasis, faced difficulties. However, our focused efforts for core brands led to the recovery of revenue to flat year-on-year in the July to September period.

In the U.K., revenue was up 3.9% as a result of continued growth of Lucozade Energy.

In Spain, our reinforced activities for the off-premise channel resulted in higher sales volume of Schweppes than the previous year, but the overall revenue was down 5.8% amidst the continued sluggishness of the on-premise market. Although we have been trying to improve the trends through portfolio reviews and other efforts, it is likely to take some more time before we make a full recovery.

Please turn to Page 6. Next, Asia. Revenue was up 15.3% as a result of continued significant growth of the beverage business. Segment profit was up 22.4% on an organic basis. When January and February results from Thailand are excluded from the Asia total, revenue grew by low 10% to 20% range, while segment profit on an organic basis grew by mid-10% to 20% range year-on-year.

In Vietnam, estimated volume growth of the market stands at near 10%, while our revenue was up 15.8% as a result of continued growth of core brands, including the energy drink, Sting, and the RTD tea, TEA+.

In Thailand, revenue growth continued, even though the pace has slowed compared to the first half of the year as a result of a series of price increases in July onwards prior to the sugar tax hike in October. In the 7-month period from March to September, revenue grew by mid-20% to 30% range year-on-year.

The health supplement business decreased its revenue by 4.1% because brands such as Essence of Chicken and Bird's Nest faced difficulties, but as a result of strengthening distribution in the key market, Thailand, revenue in the July to September period recovered to the same level as last year.

Please turn to Page 7. Lastly, Oceania and Americas. In Oceania, both Frucor Suntory and the fresh coffee business grew in revenue. Overall segment profit was up 6.2%.

In Americas, positive business momentum resulted in revenue and profit growth.

Next, I'd like to walk you through the full year forecast of FY 2019. Please turn to Page 9. Based on the results up to the third quarter and the outlook for the fourth quarter, we revised the full year forecast, which we had announced in February.

Revenue forecast on a currency-neutral basis remains unchanged from the original, but was revised down by JPY 16 billion to JPY 1,297 billion on a reporting basis due to currency effects. Revenue growth forecast of 2% remains unchanged from the original on a currency-neutral basis. However, on a reporting basis, it was revised down from 1.4% to 0.2% mainly due to the weak currencies in Europe and Oceania.

Operating income and operating income on an organic basis are revised up to JPY 111 billion and JPY 112 billion, respectively. Both are expected to surpass the original forecast by JPY 3 billion on a currency-neutral basis, but the currency effects limited the upside to JPY 1 billion.

Dividend forecast remains unchanged from the original JPY 78. I will cover forecast for each segment on the following page.

Please turn to Page 10. Japan. Revenue forecast was revised down by JPY 6 billion due to the significant impact from the bad weather in July. On the other hand, segment profit forecast was revised up by JPY 0.5 billion from the original based on the steady progress of structural reform, including the price increase.

Segment profit grew in double digits for the first 9 months, but the full year growth rate forecast stands at 1.6% due to the following 4 factors anticipated in the fourth quarter. Firstly, impacts from the typhoon in October. Secondly, lower sales compared to last year when the weather was favorable. Thirdly, continued difficult trend in the vending machine business. And lastly, active brand investments, mainly in high value-added products.

Europe. Considering the performance in the first 9 months, the original revenue forecast is unlikely to be achieved. In addition, currency effects and the reclassification of the African business to Asia segment during the period were also factored in to make a downward revision of JPY 25 billion.

Segment profit is expected to be higher than the original forecast due to good progress in actions, such as supply chain cost savings in France, but the forecast remains unchanged considering currency effects and the reclassification of the African business.

Asia. Revenue is expected to surpass the original forecast due to strong business performance. Currency effects and the reclassification of the African business was also factored in to make an upward revision of JPY 17 billion to the revenue forecast. Segment profit is expected to be higher than the original forecast due to the strong performance. The reclassification of the African business was also considered in revising up the forecast by JPY 1 billion.

Oceania. Revenue forecast was revised down by JPY 2 billion due to currency effects. Segment profit remains unchanged.

Americas. Forecast for both revenue and segment profit remain unchanged.

That is all for the segment forecast details. We have only 2 months left this year. We will stay focused on rapid implementation of structural reform in each region. That is all from me.