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Edited Transcript of 2587.T earnings conference call or presentation 13-Feb-20 8:30am GMT

Full Year 2019 Suntory Beverage & Food Ltd Earnings Presentation

CHUO-KU TOKYO Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Suntory Beverage & Food Ltd earnings conference call or presentation Thursday, February 13, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kazuhiro Saito

Suntory Beverage & Food Limited - President, CEO & Representative Director

* Takayuki Sanno

Suntory Beverage & Food Limited - Executive Officer

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Presentation

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Kazuhiro Saito, Suntory Beverage & Food Limited - President, CEO & Representative Director [1]

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This is Kazuhiro Saito. Thank you for attending our results announcement. I will start with an overview of our performance in FY 2019.

In 2019, we achieved growth in both revenue and operating income. We were also able to outperform our revised forecast announced in November, both in terms of revenue and operating income. We achieved double-digit growth in operating income on an organic basis, excluding extraordinary factors, such as M&A. This was a result of our efforts to improve profitability through structural reform and other measures.

2019 was a year in which we were able to regain a certain extent of our profit generation force, which was somewhat weak in 2018. Revenue was JPY 1,299.4 billion, up 2% year-on-year on a currency-neutral basis. As mentioned, our organic operating income was up 10.2% or JPY 117.1 billion on a currency-neutral basis. It was up 8% on a reported basis, which includes the impact of currency fluctuations. Operating income, including factors related to extraordinary reasons, such as M&A, was up 2% or JPY 113.9 billion on a currency-neutral basis. It was up 0.3% on a reported basis, including the currency impact.

Profit for the year attributable to owners of the company was down 12.3% or JPY 68.9 billion year-on-year on a currency-neutral basis. This was due to factors such as the gain from the sale of the food and instant coffee business, which was tax exempt. We outperformed the revised forecast announced on the 5th of November by JPY 2.4 billion for revenue, JPY 5.1 billion for organic operating income and JPY 900 million for net income. We are planning to pay out JPY 39 of year-end dividend, as previously announced, making the total dividend for the year, JPY 78.

Next, I will go over our medium term management strategy. There is no change to our basic strategy. We are seeking to establish a unique position in the global beverages market, and our aspiration is JPY 2.5 trillion sales by 2030. We will also continue to aim for profit growth that is higher than our revenue growth in the medium term. There are several important factors in achieving these targets. One of them is to be the first-mover. While we continue to refine our core brands through state-of-the-art innovation, we will implement our founding spirit of Yatte Minahare, create new product categories, nurture and grow the brand, and continuously provide new types of value to consumers, thereby sustaining our growth into the future. On top of this, it is important to be a game-changer. We will accelerate the evolution of our products and services with consummate skills and technologies as well as unique ideas. This will lead to us acting as a game-changer and further widening our business domain. It is also important to expand into new regions while placing a focus on growth markets.

The basic philosophies that underlie these strategies are thoroughly base our business on the Gemba and tear down walls between organizations and create a true 1 team. When we say Gemba, we are not only referring to the Gembas of our production and sales. Our basic philosophy is that the light that guides Suntory forward can only be found at the Gemba where our customers or consumers purchase and consume products. We also believe that in order to turn the findings from the Gemba into a reality, it is crucial for us to tear down and overcome walls such as race, nationality or language, and bring together as one the wisdom of the entire group. We will create a true 1 team and pave the way forward towards a new frontier of value that brings further joy to our customers.

At the same time, we will promote sustainability management and fulfill our responsibilities as a company and contribute to regional society.

I will now move on to the forecast for FY 2020. As explained, we were able to improve our profit generation force to a certain extent in 2019. Meanwhile, organic growth of our revenue, excluding the impact from M&A, et cetera, was below 2%. In 2020, we will continue to work on our structural reform while growing our top line revenue. We are aiming for 3% revenue growth year-on-year, which will be driven by our steady brand investments. Our revenue forecast is JPY 1,338 billion, up 2.7% on a currency-neutral basis. On a reported basis, including the currency impact, revenue growth will be 3%. Our forecast for organic operating income is JPY 120 billion, up 1.9% on a currency-neutral basis. On a reported basis, including the currency impact, we are expecting 2.5% operating income growth. Operating income growth, including extraordinary factors such as M&A, is forecasted to be JPY 117 billion, up 2% on a currency-neutral basis and up 2.7% on a reported basis, including the currency impact.

Net income attributable to owners of the company is forecasted to be JPY 70 billion, up 0.8% on a currency-neutral basis and up 1.6% on a reported basis, including the currency impact. We are forecasting an annual dividend of JPY 78, the same as FY 2019, and the dividend payout ratio is expected to be 34%.

That is all from me. Thank you.

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Takayuki Sanno, Suntory Beverage & Food Limited - Executive Officer [2]

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This is Takayuki Sanno. I will now explain the FY 2019 results in a little more detail. Please see Page 12. I will start with an overview of our performance in FY 2019.

Please turn to Page 13. This is the performance by segment. The figures are on a currency-neutral basis. Revenue was slightly down year-on-year in Japan and Europe, but Asia saw double-digit growth, while Oceania and the Americas also grew. Organic segment profit achieved double-digit growth in total, led by Asia.

Please turn to Page 14. I will start with Japan. We believe sales volume for the overall market fell by 2% in 2019 due to bad weather conditions in the peak month of July. However, SBF was able to control the volume decline at 1.2%, thereby, outperforming the market. Revenue was JPY 704.3 billion, down 0.6%. The decline in sales volume worked negatively, while we benefited from the continued improvement in sales trends for FOSHU and functional beverages as well as the price increase for large-format PET bottle products. Profit grew 1.5% as a result from the structural reforms. Although we are making steady progress in the medium term structural reforms, we are still halfway. This is especially so for the vending machine business, which we expect will take some time. As for establishing a high added value and profitability business model and SCM structural innovation, there are areas where we are making progress, and we will continue our efforts.

I will talk about some of the measures in our structural reform in more detail later.

Please turn to Page 15. Moving on to Europe. Revenue fell 0.6% despite the positive situation in the U.K. This was due to challenges faced in France and Spain, resulting from weakness in the market. Our segment profit on an organic basis grew 13.3%. On top of profit growth in the U.K. driven by top line growth, we improved our supply chain and drove greater efficiency marketing expenses in France and Spain. In France, volumes in the market declined year-on-year. Our main brand, Oasis, struggled, leading to a 3% fall in revenue. However, revenue in the second half recovered to the previous year's levels, thanks to our efforts to strengthen our focus and reverse the trend. In the U.K., Lucozade Energy continued to grow, leading to 4.3% revenue growth. In Spain, the on-premise market remained stagnant. Although efforts such as reinforcing our activities for Schweppes are leading to fruition, revenue fell 3.4%.

Please turn to Page 16. Next is Asia. With strong growth continuing in the beverages business, revenue grew 11.8% and organic segment profit grew 27.8%. If we use the 10 months of March to December for the beverages business in Thailand and compare the overall Asia business with the previous year, revenue grew close to 10%, and organic segment profit grew roughly 25%. In Vietnam, core brands, such as the energy drink Sting and the tea product, TEA+, continued strong growth. With the enhancement of our portfolio as well as the expansion of our sales coverage area, revenue grew 14.6%.

In Thailand, our business achieved significant growth, partly thanks to the economic stimulus package by the government. Although there was impact from the sugar tax increase in October and temporary slow down recently due to the weakening of the economy, our revenue grew close to 20%, even when comparing on a like-for-like basis for the 10 months of March to December.

As for the Health Supplement business, the sales trend is recovering as a result of our strengthening the distribution in Thailand, which is our main market. Revenue growth turned positive in the second half, while declining by 2.8% for the full year.

Please turn to Page 17. Lastly, Oceania and the Americas. In Oceania, revenue grew for both Frucor Suntory and the fresh coffee business and segment profit grew 3.4% overall. In the Americas, the robust trend continued, and PBV achieved growth in both revenue and profit. However, segment profit for the Americas segment overall declined slightly due to one-off costs related to the reorganization.

Next, I will explain our forecast for the full year ending December 2020. Please turn to Page 19. We will further promote structural reforms as well as continuing to invest in our brands for growing our top line revenue.

On Page 20, we show our forecast for each segment. We are expecting both revenue and segment profit to grow in all of our segments. I will go over each segment in more detail in the following pages.

Please turn to Page 21. I will start with Japan. The size of the beverage market is expected to remain flat or grow only slightly in 2020. However, we are forecasting around 1% volume growth. We are expecting 1.2% revenue growth, which will be driven by our continued strengthening of premium price products, such as FOSHU and functional beverages. The price increase of large-format PET bottle products will also contribute. For segment profit, we are aiming for 1% growth by further promoting structural reform, while focusing on reinforcing our brands.

Next, I will go over some of the details of structural reform. Please turn to Page 22. These are the 3 key strategies of our structural reform, and we have explained these in the past. First, in relation to establishing a high value added, high profitable model. Again, we continued our efforts to stop the downtrend in FOSHU and functional beverages by strengthening our sales and marketing activities, mainly in relation to Tokucha and Iyemon Plus anticholesterol. In addition, we will further boost our efforts in 2020 by launching new products in new categories as well as offering new services.

Next, the structural innovation of our SCM. Following the Ujigawa plant last year, we will launch another new production line in the Haruna plant in Gunma Prefecture this year. We will further improve our productivity with this new production process as well as achieve further cost reductions through various measures, such as making use of technology and using more lightweight packaging material.

Reforming the vending machine business will be our top priority. While the vending machine channel continues to shrink, this channel plays a very important role as a contact point with our customers and will remain extremely important to us. We will make each of our vending machines more attractive by strengthening the offering of merchandise, for example, by launching products developed specifically for the vending machine channel. Meanwhile, we will also seek productivity gains, such as further promoting route optimization and making better use of technology and AI.

Please see Page 23. Moving on to Europe. We will accelerate the recovery trend, which is continuing from the second half of 2019. Our aim is to grow revenue by around 1%, mainly by focusing our activities on core brands. We will also target segment profit growth that is stronger than revenue growth by raising unit prices and reducing costs.

Please turn to Page 24. In France, we will revitalize the Oasis brand, which is on a recovery track. We will also thoroughly strengthen sales of Orangina and seek revenue growth. In the U.K., we will continue to strengthen the brand momentum of Lucozade Energy, while further stimulating demand for Lucozade Sport in a wide range of sporting occasions. For Ribena, we will improve the trend despite the tough juice market. In Spain, we are seeing signs of improvement in the on-premise channel. Instead of stopping here, we will further accelerate and execute reforms for Schweppes.

Please turn to Page 25. Next, I would like to talk about Asia. We expect the Asia region to continue to drive overall growth for the business in 2020. While seeking steady growth in the beverage business, we plan to secure and solidify the recovery of the health supplement business, thereby growing both revenue and segment profit in the overall Asia region by close to double digit.

Please turn to Page 26. In the beverage business, we will further strengthen our core brands and further promote Suntory brand products in Asia. In Vietnam, we will increase our revenue by continuing the growth trend for Sting by expanding the portfolio offering and launching new products. For TEA+, we will boost sales of the Oolong Lemon flavor, popular in the northern areas. We will also further promote the Suntory brand, goodmood, newly launched in 2019.

As for the beverage business in Thailand, while we expect negative impact from the lower economic stimulus from last year as well as the sugar tax increase, we plan to grow revenue by further strengthening our Pepsi-related activities. In the health supplement business, we will strengthen our core brand, BRAND's Essence of Chicken, to make secure the recovery trend. We will promote initiatives in our main market, Thailand, as well as in regions such as Taiwan and Myanmar, while seeking to enter into other emerging markets.

Please turn to Page 27. In Oceania, we will revitalize V, the core brands of Frucor's, and seek growth in both revenue and segment profit. In the Americas, we will further improve profitability by strengthening activities related to our core brands, Pepsi and Mountain Dew as well as continuing to lower costs through measures such as starting the in-house production of preforms. That is all from me. Thank you.

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