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Edited Transcript of 3331.HK earnings conference call or presentation 18-Jul-19 2:00am GMT

Half Year 2019 Vinda International Holdings Ltd Earnings Call

HongKong Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Vinda International Holdings Ltd earnings conference call or presentation Thursday, July 18, 2019 at 2:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Chao Wang Li

Vinda International Holdings Limited - Founder & Executive Chairman

* Johann Christoph Michalski

Vinda International Holdings Limited - CEO & Executive Director

* Vicky Tan

Vinda International Holdings Limited - CFO & Company Secretary




Unidentified Company Representative [1]


Good morning, ladies and gentlemen. Welcome to Vinda International Interim Result Announcement 2019. Today, on the stage, we have Chairman, Mr. Li Chao Wang; CEO, Mr. Christoph Michalski; CFO and Company Secretary, Ms. Vicky Tan. Management will first present the results, and then we will open for Q&A.

Now I will pass the time to Mr. Li. Mr. Li, please.


Chao Wang Li, Vinda International Holdings Limited - Founder & Executive Chairman [2]


(interpreted) Good morning. Welcome, and thank you for making the time for the 2019 Vinda interim result announcement. And in the first half of this year, we have seen very intense market competition. And for this morning, we will show you a splendid results.

Despite the challenging business environment, especially in the Mainland Chinese market, we have seen a solid growth rate, and we continue to achieve a double-digit growth in revenue, reinforcing our market leadership, and high-margin products such as softpack and wet wipes achieved remarkable growth. Both e-commerce and B2B maintained strong growth momentum.

These achievements are attributable to our focus on branding and innovation. We continue to emphasize on high value-added products and continue to optimize our portfolio mix with innovation.

We can also see that there is a favorable cost factor, which is the reduction of wood pulp price, which has resulted in the quarter-on-quarter improvement in gross profit margin. And you will find in our giveback today, the Vinda 4D-Deco box Tissue, which have recently launched in Hong Kong market in the toilet wipe and handkerchiefs.

We will continue to introduce innovative products to consumers and bring a better user experience for our consumers, and I hope that you will enjoy our giveback and give us your feedback on that.

The focus for Vinda this year is a year of excellence, year of personal care. It means that we're driving the growth in Tissue. We should also leverage our well-established sales channels and achieve a breakthrough in our Personal Care business, especially feminine care business. It is our priority in the second half of this year. We have repositioned the feminine care brand, covering 3 series. The Fempro production line in Mainland China has already been put into production.

In the second half of this year, Sino-U. S. trade dispute is yet to be [resolved], and RMB move is uncertain. No matter what external environment we experience, we will invest in brand building and continue to adopt marketing strategy, which is smart to capitalize on the opportunity of the consumer upgrade trend. And we will continue to focus on innovation for risk averse and sustainable growth.

So I will pass the stage to Christoph.


Johann Christoph Michalski, Vinda International Holdings Limited - CEO & Executive Director [3]


Thank you, Mr. Li. Good morning, everyone. Vicky and I will talk a little bit about the results, which have been, I think, actually quite good.

So first, let me start with growth. We had very good growth momentum continuing from quarter 4 last year. So for the first half, we grew 13%, and our revenue is now HKD 7.9 billion. The 13% growth rate is at constant exchange rate. If you look at the performance, you will see that China really performed well, and quarter-by-quarter, we had close to 15% growth. Hong Kong also performed well, as well as some of the countries in Southeast Asia.

Overall, the Tissue performance was the best. We had very strong growth in Tissue and this time, also very good in line volume and value development. Despite the strong growth, we still have a positive trend in our average sales price, which is also good news. And we have, very clearly, a market leader position in China with Vinda now staying at -- standing at 18.4% year-to-date in June.

You can see that our mix has slightly changed. We have a little bit more Tissues and Personal Care, and this is really due to the very strong growth performance on Tissue relative to Personal Care, which grew but not as fast as Tissue.

If you look at our gross margin improvement, it was up 1.8%. And overall, it is still slightly lower than last year in the first half. Remember, we had 2 price increases last year in the first half, and our gross margin stood at 29.7%, and now it's at 28.1%.

However, you can really see some very strong improvement compared to the second half of last year, which was basically due to the high pulp prices, only at 26.6%. And if you look at the month-by-month improvement of our gross margin, April to June, you can see how quickly the gross margins are recovering due to the lower pulp prices. And as you know, we have a 4-month lag in -- about 4 months lag in pulp. So basically, that explains why the margin improvement is coming slightly behind the indices you see on pulp raw materials for yourself.

If you look at our SG&A, you can see that the percentage went down. We continued very, very strongly with our cost savings and prioritizing our advertising expenditure on higher-margin products. And on all the other areas, we have been very, very careful to spend, and therefore, we have an improvement. I think the cost saving for us remains very important even if the pulp price is coming down as this is, A, a good discipline. And secondly, we see already in some areas, especially in the lower part of the market, some increasing promotional spend and price pressures.

If you look at our solid -- at our operating profit and EBITDA, you can see that H1 [2009], our operating profit of HKD 630 million versus last year, a little bit lower of 2.5% (sic - see slide 7, "2.1"). But however, again, the month-on-month improvement and half year to half year improvement have been very, very significant. So if you compare our operating margin to the second half of last year at 5%, it is now at 8%, which is a 3 points improvement, very significant. And also, on the EBITDA front, we are back to very close to 15%, which is where it should be or above.

I come now to the segment performance. And here, you can see what I mentioned before, you have a very strong growth on the Tissue segment at 15.5% and a relatively lower growth at only 3% for Personal Care. Gross profit for both segments is slightly down year-over-year but clearly up half year over half year. And the segment result shows the same trend as gross profit.

So there, again, I think it's a year-to-year comparison, which is a little bit difficult because we had the 2 price increases. And as you know then, there's very strong volume -- a lower volume growth than before. And now we are back into growth, and with the pulp price coming through, we are getting back.

Also one interesting perspective on this is that often you ask the question, so how much premium do you have? And can you see the real improvement in your portfolio? And we did the analysis this time and basically looked at our most premium products, like Tempo and 4D-Deco, which is in your bag. And if you take that, together with Tork, that represents approximately 20% of our portfolio, and that is growing at 70%. So very, very strong growth in our high-margin area, and that clearly will continue into the future.

Maybe, Vicky, if you would like to take over from...


Vicky Tan, Vinda International Holdings Limited - CFO & Company Secretary [4]


Sure. Yes. Thank you. (interpreted) Okay. Thank you. So next, I will talk about Page 9, about the channels' performance. So in the first half of 2019, you can see the breakdown for our channel growth. For e-commerce, continued to maintain a double-digit growth, more than 30%, and e-commerce accounted for 26% of our sales in China -- 30% in China and 26% of the whole group. And at the same time, we continue to maintain our leadership positions in the different e-commerce platforms.

And for [B2B] and also key accounts, we have achieved a double-digit growth as well, 25% and 15%; and for traditional channels, it accounts for 34% of our sales. And there is a recovery of the growth rate for traditional channels, because in the past, traditional channels were pressed by the e-commerce. So the growth rate was actually flat with the previous years. But for this year, we have seen growth for traditional channels.

So next, I will talk about net profit and dividend. And the net profit is HKD 440 million. Compared to the same period of last year, there's a 5.4% growth for net profit. And for net profit margin, have -- improved by 2.5% to 5.6%, and that's why there was an improvement for our dividend payout. And we proposed an interim dividend of HKD 0.07 per share.

So next, let's talk about the effective tax rate. The effective tax rate for the first half of this year is lower than that of last year is because we continue to have tax planning for the group, including the application for high-tech enterprise qualification in Mainland China. And also, there was a deductible actions for our R&D expense, which have been improved in the first half of this year. However, some of the impacts are one-off. So for the second half of this year, we expect that the effective tax rate to be higher than the first half of this year but no higher than 20%.

So next, about some key financial indicators. As you can see that the debtors turnover days and creditor turnover days maintained at a healthy and sound level: 42 days for debtor turnover days, 84 for creditor turnover days, and this is attributable to the sales growth. For us, we can see that the finished goods turnover days have been decreased from 49 days to 46 days, and we have a reduced inventory for finished goods.

And at the same time, we can see very good growth momentum in the past 6 months, and that's why the working capital to sales ratio has hit a record low level, which is 2.9%. Compared to that over 6 months ago, there was about 1.5 percentage point decrease.

In terms of cash and borrowings. Compared to the same period of -- compared to the end of 2018, there was a decrease. And for us, there is a change for the accounting principles, which is around HKD 200 million. So now for -- our total borrowing is HKD 4.9 billion now. And for the net debt is HKD 4.4 billion. And the net gearing ratio now stands at 49.9%. Compared to debt of 6 months ago, there is 3 percentage point decrease. For net debt-to-EBITDA, reached 2.2x, decrease from 2.4 from end of last year, so a very big improvement for us.

So I'll pass the stage back to Christoph.


Johann Christoph Michalski, Vinda International Holdings Limited - CEO & Executive Director [5]


Thank you, Vicky. Thank you for that. So you might assume that everything is good for the second half, but I just want to remind you that we have lots of uncertainty as well. I think the number 1 uncertainty is probably the lingering Sino-U. S. trade tension. And the reason why we are affected by that is not because we import things from the U.S. The issue is more it has a huge effect on the exchange rate, RMB versus U.S. dollar. And as we buy our key raw material pulp in U.S. dollars, we are clearly affected by this volatility.

So you see here the RMB movement. You can see the start of the trade war. You can see the softening of the tension. And then again, in quarter -- end of quarter 1, we basically had, again, some debates, and now it seems to be easing off, but it's not done. So that is one of the big uncertainty when it comes to our H2 and also the year to come.

Pulp price, you have seen the decline of pulp price. Many people will tell you, well, we might be at the bottom of the cycle because we are getting lower and lower to the production cost of pulp. We think that pulp will remain relatively low for the rest of the year: A, because we already bought the pulp that we will use until October; and secondly, we do not see any market recovering very quickly. As you know, the warehouses are full in China. And currently, the economy was also a little bit weaker than maybe some of us hope for.

So I think this year, we are probably okay with pulp, and then we expect a slight increase in the year to come, so in 2020, and that is basically recovering demand. And also, we know that pulp always moves a little bit in circles.

I think the second -- or the third issue is clearly the market competition. As you know, when pulp price went up, we went very quickly with price increases and tried to soften that issue. And now with the pulp coming down, we expect also that the price competition will be very strong and start again, and we have seen already certain aspects of that in the lower-priced segments of the market.

I think what makes Vinda absolutely exceptional in that is that we have a very strong brand portfolio. And I think our strategy to, A, focus on high added SKUs paying back, as I said already before; and the second part is we have very little competition with the product like 4D-Deco in the Chinese market, which is still unique. And therefore, we expect that our margin improvement will continue. And it's more on the lower grade that the price pressure will increase over time.

So having said that, I think that is the few uncertainties we see. I think H2 is very clear. And I think then, it's really a competitive horizon in 2020, which we have to see.

Opportunities. We have very significant opportunities, as you know. I think you see the Tissue consumption in China has now achieved 6.4 kilogram per head. It's already at 9 in Shanghai. So my expectation is that the Tissue market is at the beginning rather at the end of its growth pace. And we see even in this market, many opportunities, for example, the kitchen towel market and the wiping market for consumers is totally underdeveloped in China. And with the changes of urbanization and people having a different lifestyle, we see huge opportunities.

The second part where we see huge opportunities is in the away-from-home market, so the professional markets where, today, a lot of the Tissue is sourced indiscriminately across retails or e-commerce. And you have seen in our display over there, some of our dispensers on Tork, be it for public toilet, bathrooms, be it in kitchens, et cetera. And these products are very specialized. There, I have a little bit of a lock-in because we -- the product sizes fits perfectly these dispensers. And there's a huge opportunity there.

And then, I think, across all our portfolio, despite maybe the slight economic slowdown in China, we do not see any change in Chinese consumers to really striving based on the budget and ever-better quality. So I think our strategy across the Vinda brand will continue to find better and better products to positioning in the premium segment. And that is the segment which grows.

When you look at the supply side, we see a continuous momentum by the Chinese government to implement the policy for sustainability and environmental control. This year, about 500,000 tons of capacity have been closed down by the government. And this is basically, normally, most of the time because of emission standards and emission rights, and that clearly helps also to take some of the lower-priced competitors out of the market.

One very important part of our portfolio is TENA, as you know, and Dr.P, which is our Incontinence Care brands. And as you know, the demographic is very foreseeable. And therefore, is a trend of an ever-aging population in China, but not just in China, across actually all Asian countries are aging -- all Asian countries are aging now. And therefore, the opportunity for TENA and Dr.P are very significant.

Last but not least, Vicky mentioned that already, our performance in e-commerce remains very, very strong. We are the market leader in all key platforms. We are growing and even in online are -- now basically have a stable to growing share, which is very good. We don't consider e-commerce anymore as a market which is special. It's so big now in Tissue that it is part of the market. And therefore, we are very privileged to have started very early, and we are still, I think, leading in the sense of what -- how we do it and the activities we do in e-commerce.

Very quickly on production capacity plan. We -- you have seen a very slight increase in our production capacity to 1.25 million tons of basically standard capacity. We have -- we are really focusing more and more our portfolio on the premium side. We have decided with the spare capacity in China to buy a little bit OEM for lower-grade Tissues, which we then convert. We also make sure when we buy OEMs, that we buy the pulp for these producers because we are very, very focused on our environmental certification of the pulp we are buying.

And I think it's for the first time, Mr. Li, ever that we have closed a machine. This was a machine, which was, I think, the #2 machine of Vinda, which was there, I think, since about 20 years, and the environmental equation of that machine was not effective anymore. And therefore, we stopped it. But I think that is a very rare case. As you know, most of the production capacity of Vinda has been built since listing. So all our factories are very modern, and all the machinery is in very good shape to continue supporting the sustainability policy of China.

All right. Our focus for next year on H1 and the next years to come has not changed. You probably remember this slide from last time. It's always basically going for growth, profit and efficiency. The growth is really focused on improving the portfolio for higher-margin products. We are very focused now on Personal Care. Mr. Li mentioned that we put our Personal Care feminine production capacity online this -- in June or May, June and now are building basically the Libresse brand in China. We are also looking into our portfolio in Southeast Asia and see very good performance of feminine and TENA.

And then on the efficiency side, when the pulp price went up, I think, early 2017, we said, let's do a very good efficiency program. And we were a bit afraid how much efficiency can you gain when you have basically very modern supply chain. And we were surprised that even us, with all these new and modern technology, we could still find areas to be more effective and more efficient. And I think this is now part of the DNA of the company over the last 2 years, and therefore, all these program will continue.

I think Vicky was very kind and said, working capital is very, very low. It's actually very hard work to bring it as low. And I think we are probably on the 2 low levels, so don't expect working capital to stand at that level going forward because it creates enormous -- it's very efficient, but it creates enormous constraint. And being like Mr. Li, not from the engineering, but the sales side, I prefer not having out of stocks because you don't make money with out of stocks. So I think we are well balanced now. The focus on growth, the focus on innovation, but also the focus on efficiency.

So thank you very much.


Chao Wang Li, Vinda International Holdings Limited - Founder & Executive Chairman [6]


(interpreted) Thank you, CEO and CFO, for your sharing of Vinda's interim result with the investors, and thank you for your questions. And as a founder of Vinda and also Chairman of the Board for Vinda, I'm also very happy to see the progress of Vinda together with you. And I think with the prosperity of the company, I feel younger and younger every year. And I have devotion for the company because I'm the founder, and also, our team with the leadership of the CEO, we can see that we are getting better and better in coping with the market.

And I hope that you are happy with the interim result this year. And personally, I believe this is a very hard earned achievement for us with the fierce competition in the market. And as a leader in the consumer Tissues, we hope to see more progress. And of course, we also want to see our leadership in the future for our Personal Care business. And as a leader player in the market, we want to maintain the healthy and sound development of the industry. And this is the responsibility of a industrial leader.

And today, I would like to share a few comments about pulp because a lot of you also asked the question concerning the pulp. And it's true that Vinda is the first player to use virgin pulp in China, which has changed the situation of using the grass pulp and bamboo pulp in China. And now you can see that the virgin pulp is the key material in this industry, and that's why the investors are so interested in asking questions related to pulp.

And because we have a very deep understanding of the industry, Vinda have -- has insights and perspective, different from our competitors. First, for China, is not a stable market for pulp. The pulp suppliers have seen stable markets in the developed market like Europe and U.S., but there was big fluctuations in the past years for Chinese market. When there is a tight supply, they will limit the supply to Chinese market. But when there is a surplus, they want to guarantee there's stable development in the developed market. It's just like the pouring milk example. So when it comes to pulp, there is more fluctuations in the Chinese market. And I always tell the suppliers, this kind of situation is not healthy.

We launched China to have stable supply just like the developed markets. Vinda continue to have long-term, stable, good relationship with the suppliers. This is our long-standing strategy. No matter how expensive the pulp price is, we can have stable supply from the suppliers.

At this moment, we understand that they need to have scheduled shipping of pulp from South America. And for China, the industry has been developing for many decades. It has become a very important market, so it is not possible for the suppliers to abandon the Chinese market.

So for many years, we have put in efforts and shortened the logistic chain for pulp to China, and that's why there were abundant warehouse in many ports. But a lot of pulp suppliers, they don't want to do that. But this is not in line with Chinese market development. And we are very happy to see that in many ports in China, there are abundant warehouse for pulp, and this is for the healthy and sound development of the industry. And that's why that we can get the inventory quickly from the abundant warehouse, which shortened the 4 to 6 months delivery cycle.

And in terms of the pulp trend this year is deeply affected by the supply and demand relationship; and secondly is affected by the foreign exchange rates; and third one, of course, is the demand.

In terms of consumer Tissues, China has seen ups and downs. In terms of the consumer markets, we can see very fierce competition. At the same time, we are seeing a tightening environmental protection policy from Chinese government. This targets not only consumer Tissues but waste papers and the packaging paper. And that's why months ago, the market rely heavily on pulp supply because we have banned the import of waste paper from mature markets. But we can see that a lot of factories who used to rely on imported wastepaper from U.S. have established companies and manufacturing base in Southeast Asia.

This kind of reliance on pulp have been restored to normal, and that's why the demand for pulp has been eased. And in the past years, pulp continued to climb up, and we believe that now what we need to pay attention is the turning point for pulp.

Just like what CEO said, we will not make a forecast for the price change, but we will be very observant, whether it is -- the trend would be a U-shape, a V-shape or L-shape. So if it is a V-shape, will it happen? If it is a U-shape, that is the pulp price has hit bottom and continue to point up, what's the possibility? Or it is a L-shape, which maintain at a very low level.

We continue to have internal discussion and also discussion with the suppliers because we are partners with the suppliers. I believe that the pulp mills and suppliers are very happy to partner with Vinda. We are also very happy to help them overcome this obstacle. We believe that a reasonable pulp price is beneficial to both the suppliers and the buyers like ourselves. We don't want it to stay very low because this would affect the reinvestment in the industry.

This low pulp price at this moment has affected the pulp mills in China because the production cost actually is higher than, for example, Latin America. So if the pulp price continued to keep at such a low level, it will affect the pulp mills in China. This kind of impact will be transferred to the supply and demand relationship. So we -- both of us want to maintain a sound development for the pulp supply and production.

And for Vinda, we should not focus on the level of the pulp price but to focus on the innovation and also our strengths to digest the high pulp price. So in the past years, you can see that we have crossed the window of opportunities of consumption upgrade. And you can see our leading performance in terms of innovations.

We continue to focus on the premium markets, such as the embossing Tissues 4D-Deco products. And we can see that the consumers really love this kind of product, so that's why you can see the contribution of our innovative and high-end products in the first half of this year.

And we have coping strategies for low pulp price. And if the pulp price drop, I don't think this is a problem. The problem is that we have seen our capabilities in coping with high pulp price. So when the pulp price is expensive, we have conducted 2 rounds of price increases.

So what's our coping strategies for low pulp price? We hope to maintain our price. As the second half is a challenge for us, how we can maintain good growth with stable price. And I believe this should be driven by innovation and also the growth of brands like Tempo in the Chinese market and Hong Kong market because the consumers really want these kind of high-end products, so this is the first point.

The second point is about the year of Personal Care. Yes, in the past years, we have learned a lot. Our team are very experienced in Tissues because we have spent a lot of time in learning. And why we say that this is the year of our Personal Care this year, I think our CEO has explained it very well. We have invested a lot of our resources in the past years in Personal Care, and our management team and employees are changing our mindset. We have DNA, not only in Tissue but also in Personal care for Tissues. We know that there are also different segments, so there are different secrets and what's our understanding of the consumers. And is it just efficient for us to buy the best machine and that's it? I think that the time has passed.

And for Fempro products, I believe, in China, there are a lot of opportunities. Yes, this is a mature market, but we are seeing a new generation of consumers. And the new generation of consumers are our target consumers. And the key is whether we have a good product or not, whether we can touch the consumers. When the consumers buy our products, I think the key is the quality. And even if expensive, the consumers will still buy, especially for the young consumers.

So we will leverage the international brand and also apply it to the local market because we are a Chinese product. We are not promoting a Western product. And we have a new brand, which is [where] in Chinese. The brand has accumulated many experience in the past years. And the english name for the brand is Libresse. And this kind of consumer fit is quite good for the JD.com festival. We have also seen very good results, and we will continue to cultivate this market.

And of course, we are still a student. We are still learning. But now we are not a primary school student anymore. We are a secondary school student now. But we will continue to learn. And that will be all for my summary and sharing.

I want to thank the investors again for making the time for this conference, and I hope that we can present better results even in the second half of the year.


Editor [7]


Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.