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Edited Transcript of URC.PS earnings conference call or presentation 28-Feb-19 8:00am GMT

Q4 2018 Universal Robina Corp Earnings Call

Quezon City Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Robina Corp earnings conference call or presentation Thursday, February 28, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Irwin C. Lee

Universal Robina Corporation - CEO, President & Director

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Conference Call Participants

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* Divya Gangahar Kothiyal

Morgan Stanley, Research Division - Equity Analyst

* Selviana Aripin

HSBC, Research Division - Consumer Analyst, ASEAN

* Sridhar Nishtala

T. Rowe Price Group, Inc. - VP

* Utkarsh Mehrotra

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [1]

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Good afternoon, everyone. Today, we are reporting unaudited results for the calendar year 2018. Our agenda will be divided into 3 parts, first, a discussion of our calendar year 2018 unaudited financial results, a presentation of the performance of our 3 business divisions. Second is a recap and update into what we identified as key priorities last year, including our transformation programs. And third, we'll be discussing our expectations for this year, 2019. After my prepared remarks, we will then be happy to take your questions.

So if we get started for total URC, our top line sales for the full year 2018 came in at PHP129.5 billion. That's a growth of 4% versus last year. Our top line growth for the year was driven mainly by our agro-industrial commodities businesses, a strong recovery in Vietnam, and consistent performance in Australia.

But despite the growth in the top line, as we have been reporting throughout of last year, our earnings before income tax is still on a decline. So full year EBIT came in at PHP13.8 billion. That's minus 7% versus year ago. And this is in line with our revised internal lower forecast after including transition costs for the Philippine coffee relaunch, which I will come to talk about in a few minutes.

The decline of earnings for the full year has been driven by lower sales volumes mainly in coffee and higher selling and distribution expenses in the Philippines to improve our customer order fill rates. We also encountered higher input costs in our flour and feeds divisions and higher operating expenses in our farms division.

Please note that we will now be reporting EBIT and margins excluding the revaluation gain and loss of our biological assets from the farms division, as there is a change in the way we're accounting for the hogs, the livestock assets.

Turning into branded consumer foods Philippines, our full year sales is down minus 1%, ending the year at PHP58.3 billion. Top line was mainly dragged down by the decline in coffee, with most of the other categories in good growth. For the fourth quarter, top line declined by minus 2% versus last year. And this reverses the gains that we've had in the previous quarters. But as I will come to describe, this is due to some decisions we took that restrained our growth in the fourth quarter.

We're happy to note that our snack foods and noodles businesses continue to exhibit good growth. And ready-to-drink tea reaccelerated in the OND quarter and ended the year in good growth.

On the other hand, we made deliberate choices in quarter 4 that affected the product supply of certain categories. And this restrained or tempered our growth in the last quarter. Without these choices, we would have been growing quarter 4 again by another 1% to 2%, consistent with the quarter 3 trend.

The decisions we took to restrain growth in the fourth quarter was driven by the conversion of packaging lines and changes in formulation to prepare for the relaunch of our Great Taste coffee. We have made the relaunch possible, which went live in January, and this necessitated a number of changes that needed to be taken in the month of December.

In addition to transitions in the coffee supply and preparation for the relaunch, we also took the final step last December in shutting down the Rosario plant in the Philippines and transferring some of the remaining lines to other factories. And this affected the fill rates of certain categories, most notably chocolates.

In the middle of all of these product supply transitions, we also experienced some negative impact from the port congestion that hit the Manilla port in the month of November/December.

Operating income for the full year was a decline of minus 20% versus last year, amounting to PHP7.1 billion.

Just a few comments on some of the categories. In the Philippines, overall core snacking grew by 3% for the full year. Quarter 4 growth was also good at plus 3% versus year ago. Demand continues to be buoyant. We just had to deal with some of the product supply transitions I mentioned earlier, primarily in chocolates, which suffered a decline in the fourth quarter. However, we had good growth coming from our bakery products, which was up about 9%. Snacks was up 3%. And candies was up plus 9%.

Noodles, our Nissin joint venture, completed a very strong year, in total growing by plus 10% versus year ago. And this was mainly driven by our Payless brand in both pouch and cups segments.

Turning over to beverages, ready-to-drink tea recovered growth in quarter 4 to plus 8%, ending the year at plus 6% growth. For the full year, volumes were negatively impacted by the sugar tax. But given the pass-through of the sugar tax, overall net sales was still positive.

Coffee declined by 16% for the full year. Steady sales was posted in the previous months, which continued into quarter 4, except for the month of December, where we deliberately reduced trade inventories to prepare for the relaunch this January and the transition of a number of our product supply facilities to enable the launch this January.

As previously stated during the last call, quarter 4 also had tougher comparables in 2017 due to some forward buying last year in anticipation of a price increase implemented in late 2017, coupled with some heavy promotional push during OND 2017.

Let me now give a brief update on some of our joint ventures and license brands. Our joint venture with Danone grew sales by 24% versus last year in the fourth quarter. The entire year, though, was down about 15% as the B'lue brand was -- suffered from the sugar tax implementation.

However, we have already begun to recover lost market share, which dropped during the sugar tax implementation months. But we made some corrective actions by the middle of the year and launched new products like B'lue Pro energy drink and a new cucumber lime flavor in our core B'lue lineup. And this has begun to recover our market shares in the latter half of the year to levels even higher than prior to the sugar tax implementation.

Vitasoy also grew strongly, plus 72% for the full year, plus 14% for quarter 4, and was driven by strong campaigns into introduction of our soy milk products. Campaigns were focused on growing dairy consumption, trends in healthy lifestyle among younger consumers. And we continue to invest in both branding through digital targeting and distribution, especially in modern retail channels.

On Calbee, which is our premium potato snack brand, we posted a very strong growth of plus 24% for the full year. And this was driven mainly by a very successful honey butter flavor, which tripled its size from -- since its launch in 2017.

Last but not the least, we started to take over the Swiss Miss powdered chocolate business. And this grew plus 22% on a quarter-by-quarter basis, driven by sustained advertising efforts and promotions.

Moving on now to our international division, our international sales for the year grew by plus 4% versus last year, ending at PHP44.4 billion. And this was driven by the continuous recovery efforts in Vietnam, sustained momentum in Australia.

We were also able to mitigate the decline in New Zealand. We talked about some price increases that we had to take to drive earnings and margin structure in New Zealand, which affected top line rate. And we now see the rate of decline mitigating into quarter 4.

And the other key market where we had a decline internationally was in Thailand, where sales was affected mainly by distribution restructuring decisions taken in 2018 to change distributors in Myanmar and Cambodia.

Earnings before income tax for the full year came in very strongly at a growth of plus 19% versus year ago, amounting to PHP3.8 billion, with margins improved to 8.5%. The improvements came from our key markets, Australia, New Zealand, and Vietnam.

Performances of some of our key markets are as follows. Vietnam is on track on its path to recovery, as sales continue to grow by plus 21% for the full year in local currency terms. We continue to reap the benefits of our drive to recover numeric distribution, as well as gain additional sales from new products launched in the latter half of the year. We launched milk-tea variants into Vietnam, which are performing very, very encouragingly in its launch months.

Thailand sales remained weaker than expected, resulting to a decline for the full year of minus 9% in local currency terms, as we made deliberate choices last year to restructure our distribution systems and partners in both Cambodia and Myanmar.

Australia maintained a good growth at plus 4% in Aussie dollars, with strong sales in both branded and private labels. New Zealand, as I mentioned, declined minus 11% in local currency terms, although we are seeing that decline taper off in the recent quarter and returning to growth as we start the new year.

Last but not the least, let me discuss the performance of the agro-industrial commodities division. Total agro-industrial and commodities sales increased by a very strong plus 15%, amounting to PHP25.3 billion for the full year.

Full year earnings before income tax increased by 5% versus last year, amounting to PHP4.8 billion. This is -- the earnings were mainly driven by our sugar and renewables business. The top line was very strong for both sugar and flour. The earnings was driven mainly by sugar, with good volumes and higher selling prices of sugar.

Earnings in the flour division and the agro-industrial group were affected by commodity costs, which I'll come to discuss in the next few minutes. While agro-industrial's top line was very strong at plus 16%, driven mainly by our feed sales, earnings declined as a result of the impact of higher input costs in feeds, higher operating expenses in our hogs facilities, and poultry was affected by the impact of avian flu in the middle of last year.

Please note that we had incurred a revaluation loss of PHP421 million for the full year versus a fair market valuation gain in the prior year. So that is a change. But this change includes changing the amount of stock that we mark to market for our biological assets.

Commodities, which is our flour and sugar business, revenue was very strong at plus 15%. Sugar excluding renewables sales were up 16%, driven by higher volumes and higher prices in sugar. Flour and pasta sales also grew very strongly at plus 15%. And earnings growth increased by 21%, driven mostly by higher average selling prices, higher volumes, offset by higher input costs in the flour division.

Turning to our balance sheet, cash position remains very strong. Our net debt position remains fairly the same, PHP26.5 billion in net debt position, mainly due to the long-term debt in Australia and New Zealand associated with the acquisitions. Our gearing ratio continues to be in a good state at 0.48. Our cash position ended at PHP13 billion. EBITDA reached just under PHP20 billion, with the main use going to capital expenditures at PHP8.3 billion and a dividends payment of PHP6.9 billion.

With that, for 2018, let me move to the next section of the presentation. And this is to start with some of the overall expectations we have for this new year, 2019. We expect a stronger momentum for our top line growth. As I've mentioned in previous calls, we are working on a number of programs to drive cost efficiencies and savings. We plan to reinvest a significant portion of these cost efficiencies and savings to invest in brand building and innovation and to grow our brands. Having said that, we will hold if not slightly improve on our margins for this year.

And recall that, about 7 months ago, I articulated my immediate priorities for the business in terms of fixing the basics, and there were 3 of those that we talked about in coffee, in distribution, and in supply chain. I will now give you more color and some updates on developments of each of these priorities, which would help us deliver our top line and profit expectations for 2019 and beyond.

Starting off with coffee, one of my first priorities when I joined as CEO was to look into the coffee situation and to see whether we can come up with some immediate fixes and something that can be sustainable. We quickly diagnosed the problem through better customer and consumer insighting and using agile methodologies to do prototypes to produce fast prototypes, putting them into product tests, and iterating them very quickly. We looked at many dimensions into the issue. And our belief is that addressing the product was of paramount importance to address the coffee decline.

I'm happy to announce that, after just 6 to 7 months of work, we have been able to reach the commercialization phase. So we opened for booking our new Great Taste relaunch products last January 11. We are launching 2 new variants, white caramel and white crema, on top of our original Great Taste white. These 3 variants will address the identified subsegments of the white coffee market, based on our insights research. We believe that we have hit the right formulation, with market research concluding that we have a preferred -- we have preferred products compared to competition.

We are also using the coffee relaunch as a momentum driver to work on the other transformation programs, like distribution. The transformation program on route to market, reinvention, should benefit our coffee business and vice versa, as we aim to increase numeric distribution in the near term. And coffee will be the anchor product for this distribution drive.

We opened new coffee bookings last January 11, and we are now in the process of pipelining the product, both in modern and traditional retail. And to date, we are already almost at 100% availability, and our merchandizing execution is on track.

On investments, we plan to invest advertising and promotion money both for above-the-line communications and below the line for trade and consumer promotions in the coming months. Our aim is to generate greater awareness, conversion, and trial for the brand. We'd hope that we will slowly recover lost market shares and arrest the decline of coffee.

Very early days, we're about 6 weeks into the launch. Early reception from trade have been positive. But we note that we are facing very strong competition. We expect competitors to react. We're already seeing competitive response with significant moves in advertising and trade promotions in the month of February.

Moving onto the other transformation programs, let me turn to our product supply chain transformation program to try to develop a more efficient, robust, and responsive supply chain ecosystem. We mentioned about piloting lean manufacturing excellence in the last year. We're happy to report that we have now begun to see results from the pilot program, which we started in our facility in Calamba Laguna. The aim is to take unnecessary costs out of the production system through waste reduction and manufacturing process optimizations. The savings we generation from this program can be helpful in reinvesting back to grow our brands and support our innovations.

We are also piloting a study on supply network design. We're about halfway through our supply network design study. We're starting with the Philippines, but the network design study will look at the entire total URC footprint. When we are -- we started the Philippines, given the complexity of our current network and the necessity to continue fulfilling product supply. This will lay down the -- several plants that we will execute in multiple phases.

Lastly, we have successfully aligned our supply chain structure organization. We've installed integrated supply chain organizations in key -- several key markets. We are also instituting a more robust sales and operations planning that better links demand forecasting down to supply network planning. And this will enable us to continuously improve our responsiveness and service levels to our customers.

Moving to our second program on being a partner of choice, we started with our focus on our trade customers. This focuses on better customer engagement as well as capability building on our functions that drive our route to market effectivity. On customer engagement, we have reengaged with our regional distributors a number of times with the aim of dramatically increasing our direct store coverage.

As we reengage with our regional distributors, we are presented our transformation plans, our plans to support them, our focus on route to market enhancement. We've aligned objectives and targets with our distributor partners to guarantee seamless execution. We also listen to our distributor partners to resolve any outstanding concerns. And on our monitored key accounts, we have also started to engage proactively to conduct more meaningful joint business planning exercises and strengthen our partnerships with some of the biggest and growing accounts in several of the countries.

On capability building related to being a partner of choice, we are rolling out digital efforts in our salesforce. And this will allow them to plan better, monitor level of our sales activities, going all the way down to the census level, geotagging where the stores are. And this will help us map the most efficient routes, monitor our sales productivity. We have also started deploying salesforce automation tools to our sales force and to our distributor salesmen in order to capture real-time data and fulfill orders faster.

Next on our transformation program is about products and brands that people love, which is the heartland of URC. And this is about improving our portfolio innovation management process. So we have embarked on new innovation discovery processes. And this new innovation process management system was rolled out in 2018.

This culminated in a first innovation summit that we held in November 2018 across entire total URC, where we discussed the most important consumer trends and made some choices on our biggest bets for innovations. We had a pipeline review on our branded consumer foods product portfolio as well as looked at new initiatives in our agro-industrial commodities businesses.

We also just announced an organizational evolution to align our innovation and marketing structures to allow for better leveraging of URC scale across the region. We expanded the roles of our snacks and beverage business unit heads in the Philippines to extend to looking at regional innovation for total URC.

The aim is to become more agile and customer-centric in these innovation process improvements. And we hope that this change we can get better synergies and more seamless brand execution across branded consumer foods in several countries. This will also provide better support to each of the markets as they continue to identify the next legs of growth.

Last but not the least, a comment on our people and planet-friendly culture efforts in order to make us a leading sustainable enterprise going into the future. As a follow through on our commitments last year, we are now putting more details in our sustainability strategy, as we have completed conducting our baseline last year. Our baselining activity proved to be quite challenging, given the diversity of the company's business. But we have now completed the baselining effort and in a few months' time should be able to go external with our commitments on improvements based on the established baselines that we've collected.

We are going to be focusing our sustainability efforts on 3 materiality areas, on natural resources, on people, and on product. In terms of resource management, URC will be addressing our stewardship efforts focusing on efficiencies in energy use, in water use, and also in solid waste management.

On the people front, we are building a strong culture of safety and quality. We are measuring -- we have started to measure, and we'll continue to look at improvements on lost-time frequency injury rates as well as all injury frequency rates. And we're also committed to grow our own talent by ensuring that all employees in total URC are receiving substantial training hours. And we are going to establish our culture of sustainability starting this year, as we conduct programs and training sessions based on these materiality points.

In communities, we are aligning our CSR programs across the different units, and we are committed to uplift the lives of people and have geared our programs towards the areas of education, environment, and nutrition.

And finally, on products, URC's committed to deliver best-in-class food safety through getting food safety system certification 22000 in our facilities, ensuring we are -- ensuring our operations are in line with the best-in-class food safety standards. We will also drive the expansion of our nutrition-dense portfolio, working on several better-for-you product platforms. And this is in line with emerging consumer trends in health and wellness concerns.

Lastly, we will be promoting sustainable packaging as we push ourselves in making as much of our packaging recyclable. We are now in the process of finalizing our targets for total URC. And we'll provide more details in April when targets and commitments are set in place.

To end this short presentation, we just want to brief everyone that we will continue to implement initiatives based on the 4 pillars -- based on the 4 strategic pillars of people and planet-friendly culture, product supply chain transformation, being a partner of choice, and in driving products and brands that people love. We're hoping that, with clear priorities and plans in place, coupled with our drive to execute better, 2019 will be the start for URC to pivot back to a more sustainable top line and profit growth.

Before we wrap up, we would just like to advise everyone on the accounting standards and financial reporting changes that will be applied in 2019 and some that will appear in the audited results for 2018 when you see the audited final statements in April. The report will already restate for some of these accounting standards changes.

So there are 5 changes in reporting that will come into play. The first is on IFRS 15, on revenue from contracts with customers. This is to recognize revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Essentially, there will be some movements, with no impact to our earnings. And this will just be some transfer of cost items from one line of the P&L to a deduction from sales in line with international financial reporting standards.

The second is on IFRS 9, which deals with financial instruments, shifting the impairment paradigm from an incurred basis to an expected credit loss approach. And this will -- we do not expect any significant changes, but we will dot the I's and cross all the T's to make sure that we are in compliance with IFRS 9.

The third change has to do with leases, tied to IFRS 16, which deals with recognition and measurements, measurement on the rights of use of assets and lease liabilities, essentially dealing with rents, turning from operating leases into financial leases.

Again, we do not expect this to be a heavy impact for URC. Please note that this implication of the above stance on the URC business are -- we would consider quite minor with no impact to earnings, but potentially a reduction in reported net sales as we transfer certain selling expenses such as promotions and payments to retail accounts that used to be under operating expenses and will now be reclassified as deductions to sales.

We also have accounting treatment changes related to something I referred to earlier, market valuation gains and losses in our farm division, to do with biological assets, which is really our stock of hogs. In the past, we have been marking to market the entire stock of hogs that we have. And we have made the change that this is actually not an appropriate representation of the business. And a proper mark to market really should only deal with commercial stock, which is much lower in number. Anyway, we've made the adjustments now in 2018 and will henceforth continue to report on that basis.

Last but not the least, we will be reviewing our intercompany transfer pricing under the branded consumer foods business and will report underlying profitability for domestic businesses more clearly and segregating that from nonaffiliate transactions. We will provide the restated quarterly numbers when we conduct our first quarter results earnings briefing at the end of April.

And that concludes our prepared statements. And we are now happy to take your questions, and the operator will facilitate any questions that you have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question coming from the line of Divya Gangahar from Morgan Stanley.

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Divya Gangahar Kothiyal, Morgan Stanley, Research Division - Equity Analyst [2]

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Thank you, Irwin, for the presentation, and thank you for the opportunity to ask my question. I'll ask 3 questions. Two of them are related to your expectations for this year, and the third one has to do with Vietnam. So on the first question, you mentioned that you expect the top line momentum to improve. Can you help us understand what are you really referring to in terms of revenue growth? And if you could break it down in terms of your expectations on pricing versus volume for 2019. Are we talking about high single digits, low double digits? If you can give us some direction there. The second one was on the margin in which you said should be better or same. I'm assuming this is on consolidated level. If you could comment specifically on the BCS business and what your assumption or expectation there is, that would be helpful. And the third question is that I noticed that Vietnam's revenues actually decelerated in the fourth quarter. Any comments there on anything in particular happening? And if you can just tell us on an annualized basis where are we in terms of sales versus pre-recall levels, that would also be useful.

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [3]

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Okay. On revenue growth for 2019, we expect the momentum to improve. We have previously talked about being comfortable with an organic mid-single level type of growth. That -- we continue to see that as imminently very comfortable. We could do better perhaps, but I think it's too early to call. A lot of uncertainty around the sustainability of the coffee relaunch, and that's why it's probably difficult to pin it down to a much narrower range. But I think the mid-single-digit growth that we referred to in the past is a figure that we are holding ourselves at minimum to deliver. The price and volume shape will not be very different from 2018. It will -- we will continue to do some amount of moderate price increases. There are still some input cost pressure despite the fact that people believe a benign environment has come upon us. We continue to see some input cost challenges. We will price where the entire market is affected by those input costs. I'll give an example. In the first couple of months of the year, we already saw noodle price increases being taken by the market leader, and we have very quickly followed given that there are still some effects of cost pressures in that business. So I think the price/volume proportion will not be very different from 2018. So -- and that means up 1 to 2 points of price mix in the growth numbers. From a margin standpoint, you're correct that we're referring to the consolidated level. And what we expect to see is reinvestment in the Philippines. We don't take this coffee relaunch very lightly. We have set aside adequate resources. So we will see profit improvement even in the Philippines. We are allowing for profit growth slightly behind the top line growth in the Philippines just to give us some wiggle room in investing in our brands. But we will continue to see margin improvements in our international divisions most certainly. In the Philippines, we're working on maintaining margins, but we are happy to accept a very, very slight margin reduction in the Philippines if it is required to support our brand-building efforts. And on the third question, Vietnam, the fourth quarter decline, yes, we are getting into harder recovery stages. I think I mentioned in the past about recovery starting in the south, in the Mekong Delta-Ho Chi Minh area, moving onto the north around Hanoi. And we are now moving into the central areas -- north and central area. So the recovery rates will taper off a little bit. We continue to think that it will -- that we could still do double-digit growth in Vietnam. We are -- I believe after 2018, around -- let's call it about 2/3 of the way back in Vietnam. So our target is to try to get to about 3/4 of the way back in 2019. That would translate to still a double-digit growth, perhaps not as high as 20% but certainly somewhere in the 10% to 15% type range, which we're seeing in quarter 4 of 2018. We have plans in place to try to accelerate that if we can. But for now, I think that's probably a good representation of what we might be able to do in 2019.

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Operator [4]

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We have our next question coming from the line of Sridhar Nishtala from T. Rowe Price.

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Sridhar Nishtala, T. Rowe Price Group, Inc. - VP [5]

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I just wanted to follow up a bit on the margins. So I understand that you need to invest behind the coffee relaunch, et cetera. But you also spoke about other initiatives and trying to contain costs on the other hand. So if we ignore the short-term issues, so if you look at what the trajectory of margins is likely to be on a medium-term view, medium being 3 years, where do you think margins for the consumer businesses will be, domestic and international, and on an overall basis?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [6]

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Yes. So if we look at the overall basis, we are just a bit under 11% right now. The trajectory is going to be hard to pin down. It depends on what happens this year. Our -- in a couple of months' time, we would probably quantify for you much more clearly the amounts that are going to come out of our product supply chain transformation programs on a multiyear basis. So you're correct to ask about the mid to long-term glide path of this. We are setting ourselves a plan to move towards mid-double-digit margins, call it, in about 5 years' time. The question remains whether that is a step-ladder shape, whether that is an S-curve-type shape, whether that's a hockey stick. That one we can't really predict at this point. The product supply chain transformation programs, coupled with the partner of choice transformation programs, the larger one, which is going to give us growth scale and some kind of margin improvement from a fixed cost coverage standpoint, those are being rolled out as we speak. Our intention is for this year to reinvest a significant portion of those into brand building. So I don't expect a big margin move this year. We could get some positive surprises depending on where the foreign exchange rate, oil prices hold or not hold. That could come as some upsides. But we're not counting on those as helps as of this moment. We are also uncertain on how much of a war chest we will be needing to build as we come back very strongly on coffee. We believe in the products that we have developed tremendously. We have a strong concept. We have products that have won in blind tests, but these are blind tests. The ultimate test will be how the consumer responds to them. So we are sort of holding onto a number of the efficiency gains that we planned for this year so that we have every ammunition to see this relaunch through. And by the way, not only for this relaunch, but there are a number of initiatives on the other brands as well that we want to make sure that we support properly.

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Sridhar Nishtala, T. Rowe Price Group, Inc. - VP [7]

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Okay. Good. If I may just follow up on that, just on the margin front, so you talked about pricing of 1, 2 points as a contributor last year and similar this year. If I look at your operating margins for domestic in the consumer, that's fallen by like 2.5 to 3 points last year. How much of that is gross margin pressure, and how much of that is operating expense deleverage?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [8]

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I can't give you the mix. It's a combination of both. We made some deliberate choices I think in operating expenses, investments in additional consolidated warehouses to improve our customer order fill rates. That is a portion of that. But it would probably be roughly half-half. We can give you the specifics. We did see our gross margins come down last year, so probably in about 100 basis points or so. That's -- part of that is the math because, when we had to pass through sugar tax, of course, sugar tax came in as a big way into our costs of goods sold. We passed in absolute the entire sugar tax on. And while we're whole in terms of absolute money, the margins would've declined on that. Frankly, the other issue on gross margin erosion is a bit about mix. We -- I think our pricing have recovered -- our pricing and internal cost-saving efforts have in a large part addressed a lot of the headwinds on inflation and input costs. The sugar tax we have passed on in absolute. But that would have a margin impact. But we do have some mix issues. When coffee is on the decline, it has some impact within coffee. The migration of coffee from singles to twin packs, the migration of size mixes in a number of our businesses, it's all kind of swept into that gross margin erosion. But in terms of GM erosion versus operating expenses, we can get back to you on the specifics. But it's roughly about half and half.

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Sridhar Nishtala, T. Rowe Price Group, Inc. - VP [9]

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Half-half. Okay. Excellent. And the last question I had was just, again, the numerical distribution expansion, which you talked about, as well as the initiatives in Philippines. You talked -- mentioned that in Vietnam as well as in international markets. Can you give us a sense particularly for Philippines? What are we talking about in terms of the universe where your coverage is at right now? And what is the pace of expansion of that coverage over time?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [10]

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Yes, I'll refrain from giving too much specifics. But I'll give you a bit of directionally where we're headed. So as many of you know, there are over 1 million stores in the Philippines, about 1.2 million. And about 1.1 million of these are these very small stores, the likes which we call sari-sari stores. So obviously, nobody tries to directly cover all of this 1.1 million stores. So it's a question of, what subset of that should we be directly covering? Now that should not be confused with numeric distribution. We do have good numeric distribution because we can get numeric distribution indirectly via wholesalers and brand pull when a brand is really, really strong on a consumer pull basis. So what we're trying to do is we have a large amount of regional distributors, as you'd expect us as an FMCG company to have. We have basically reenergized and reengaged with our regional distributors. And what we want our regional distributors to do is to try to directly reach more of these small stores. So distributors, of course, sell to both wholesalers and to direct stores. There has been a larger dependency on wholesalers in the past. And what we're trying to do is to reach more directly covered stores. Now this directly covered stores, currently, they buy through our distributors. And our distributors cover a number of them in a certain route-planning system. From what we have observed, we have many opportunities to actually reach more stores. And we're talking about potentially doubling the number of direct stores that we would reach. It does not mean that proportionately our sales would double because some of these stores perhaps have been already buying their products from a wholesaler, for example, which we would then displace by directly covering them. But by being able to cover more of this direct stores, and directionally, we're talking about doubling in about a 12 months' period, the benefits we see is we can control the environment in that store. Our speed to market will be faster. The number of lines that we sell to that particular store we can control and expand. So there will be a sales uplift benefit in terms of just more lines bought, turnaround time of serving them in this particular subset of stores that we have. We have benchmarked ourselves versus the biggest competitors and the best in class, even into categories that we currently don't operate in. For example, many of you would know about the beer company's reach. Of course, we are not in the returnable glass bottles business. But we have studied how deep and how many of the returnable glass bottles companies reach. We have looked at household and personal care companies and how deep and how many they reach. And we have benchmarked ourselves to that. And based on those benchmarks, we see that we will be able to double the number of our direct store coverage.

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Sridhar Nishtala, T. Rowe Price Group, Inc. - VP [11]

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Great. So doubling over one year, and then you think you're done, or does this have more legs to go over the next --

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [12]

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There are more legs to go. There is a Phase 2. I think we can double in a year. And then we are going to try to hit best in class. We benchmark ourselves with some of the biggest multiportfolio multinationals. And that might take another 2 or 3 years. So again, this is a -- that's why it's a multiyear transformation program for us. And learning from the Philippines, we're also not just learning from them. We're also doing similar efforts in other countries.

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Operator [13]

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So shall we move to the next question? Shall we move to the next question, sir?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [14]

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Yes, if there is.

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Operator [15]

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We have the next question coming from the line of Selviana Aripin from HSBC.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [16]

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Sure. I have 3 questions, the first one, around the Philippines with regards to EBIT margin. Would you be able to give a little bit more color in terms of where we are in terms of margins versus the peak and where you see margins will be going into next year? I know that you mentioned (inaudible) expect to see a lot more EBIT margin uplift going ahead. So that's my first question. Number 2, with regards to your multiyear turnaround program, which includes -- necessarily entails things like higher selling costs and distribution costs, so on and so forth, how do you see margins going ahead over the next 3 to 5 years? Are you able to give some guidance around that? My question number 3, with regards to your 2019 guidance, I do know that you actually said that (inaudible) momentum for top line growth as well as to maintain or improve margins. I am wondering if this really takes into account the changes in accounting standard and changes in your accounting treatment. In other words, I'm asking, is that directly comparable to 2018 numbers now, or should we wait for the restatement numbers in…

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [17]

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Yes, okay. Sorry, can you repeat the second question? The line went a bit soft.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [18]

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Sure. My second question was around the multiyear transformation program, and how do you see margins actually trending over the next 3 to 5 years, when we are still (inaudible) transformation program. And when do you think you -- I know you talk about (inaudible). But is that how long you think it will take to be finished with your transformation?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [19]

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Okay. Yes, so let me take the last question first. The accounting standards we don't expect to have very material changes to the numbers. By April, the dust will settle, and everything will be much clearer. But the main impact I see from these changes from a total consolidated basis, probably the most significant one really is just a movement of promotional spend, payments to trade customers that used to be in selling expenses that will be moved into a deduction from sales. So that just has the effect of lowering the net sales number a little bit. And therefore, the margins might look a little bit better. But we're talking -- I don't know -- 10 basis points, 10, that kind of minimal impact. So I don't think it will be significant to how we're viewing the business. The numbers we have presented today, just so not to be confusing, we have expressed everything today under the old system, quote-unquote the old way, the non-restated way, pre-IFRS 15, 16, 9, etc. So all the numbers you see today will -- we will try to give you a very clear bridge into the restated way. But I don't expect it to be dramatically different.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [20]

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(inaudible).

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [21]

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Yes, so the guidance -- our expectations will not change because we would restate the base anyway. So when we say we're going after mid-single-digit growth of the top line, it doesn't matter whether it's the old or the new way of expressing net sales, for example. Similarly, we will be very fair. If the margins are impacted by a change in any of these standards, and if it's a margin held, we won't claim that margin held that the accounting board has given us. So we will restate the base. And we will go from there. Your second question on the margin trajectory is a bit similar to I think the earlier question. Is it 3, or is it 5? Hard to answer at this point. All of our transformation programs I've described. We've got a 3-year quantification effort underway. In about a couple of months' time, probably by April, we'll be able to quantify the entirety of the program benefits. I'm not sure that we would necessarily give the by-year glide path, but we at least will have a good sense of the total program benefits. We already have a sense of them because we have run pilots. We just want to have a much more complete and comprehensive picture to do that. So similar to what I said earlier, I think the margin improvement over the next 3 to 5 years, to take your timeline, we haven't really, really put in place where that would be. We're allowing ourselves the flexibility of where to pull it forward and where to push it back. And frankly, that will depend on the degree of confidence we have in when the program benefits will be realized. We are pretty sure about the program benefits. But we're not sure at this point, and it would be probably irresponsible to lead people on to the specificity on when that will land and which particular year that will land. But we do see that we can have sequential improvements over the next 3 to 5 years. And last but not least, on the Philippines, so I think, on the presentation materials, we showed Philippines finishing at about 12.3% on an EBIT margin. It probably came down from the past years. It was about 13-plus just a year before and probably came from a height of double-digit -- mid-double digits in its peak year. So there's 2 to 3 points of recovery that's needed. We're -- we feel like we will be able to recover that, again, not in the short term, but these program benefits and these transformation programs we're doing, both on the product supply chain side and in our distribution side, we believe that we can get back some of those margin lost. We are also looking at our product portfolio to see where we can improve some of our product mixes as we are going to continuously work on the value tier, but we're also beginning to work on some more premium innovations. So a combination of I think these efforts should allow us to rebuild the 12 or so percent margin that the Philippine business has and drive it back up towards mid-double digits.

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Selviana Aripin, HSBC, Research Division - Consumer Analyst, ASEAN [22]

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One more follow-up question with regards to Vietnam. I know that you mentioned you are coming to the hard growth part of the recovery. (inaudible) margins trend the same time next year.

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [23]

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EBIT margins for Vietnam are improving step by step. It was a very good improvement for 2018. We expect sequential improvements in the succeeding years to the tune of between 50 to 100 basis points in Vietnam. That's the kind of magnitude we're looking at in rebuilding Vietnam. There are very good cost efficiency efforts going on in Vietnam, including -- and coupling that with the sales growth leverage, I think we should be able to drive sequential margin improvements for Vietnam.

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Operator [24]

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We have our next question coming from the line of Utkarsh Mehrotra from JPMorgan.

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Utkarsh Mehrotra, JP Morgan Chase & Co, Research Division - Analyst [25]

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I have 3 questions. If I may, I can just take them one by one. So firstly, on the coffee, it would be great if you could give us more detailed color there as in post-launch. I would expect there would be some inventory impact coming in, in first quarter. So any sense of that, and if you could give us any direction on -- you talked about the competition on that side from the new players in February and whether that has actually affected the sales for the new products. And is the expectation then to grow along with market in 2019 or still below that? That's on the coffee.

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [26]

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Okay. On coffee, I'm not expecting any significant inventory impacts by the end of the first quarter, primarily because we made the hard choice in December to take down trade inventories. So as painful as it might be for December, we could've done better in 2018. We could've done better in December. But I think the right thing to do was to prepare the launch properly. So we actually did take -- and because we're changing -- and primarily because we're changing packaging, even on the original Great Taste White, we have updated the look of that package. We have addressed size impression issues. So we had to really dial down and draw down the inventory levels in December for the old packs. As we came into January, as we opened for launch on the 11th of January and going into February, we -- again, the trade reception has been quite good. We were hoping to rebuild our inventory to the old level. And frankly, we're not yet all the way back to the old level because our trade customers are taking everything that we're producing for the relaunch. So that's to the first point of whether we're going to see any inventory adjustments. Having said that, I do expect some pipelining effect to taper off because we are adding 2 variants into the mix of our portfolio. We're adding white caramel and white crema on top of our original Great Taste White. So obviously, that has a bit of a pipeline going in. And perhaps, because of that, we're seeing competition respond. We are anticipating, of course, a competitive response. So far, early days. I think we have seen the expected trade promotional deals to try to soak up working capital and cash of store owners. We have seen adjustments to media weights, just to make it a bit louder and heavier. As we come in, we have done announcer advertising as well in February. And we've seen some advertising media weight level adjustments. So a couple of these we've anticipated. We fully expect that there will be a similar response. But we're in this for the long game. So we're not reacting to each and every trade promotional deal that comes into the market. We've got a full year to go and the next year or so to go. Our expectation is that we would hopefully grow ahead of the market. And the whole objective is for a market share recovery. Now as normally the case when you get into this very kind of heated competition that is good for consumers, there could be an upside to the market growth itself. That we will wait to see whether that happens or not and that it's not just a zero-sum game. Very typically, when all competitors throw in significantly increased activities, excitement in the market, new products, and things like that, we generally create some new trial moments from the consumers. So that's what we can't gauge at this point. It's too early to tell. But our objective certainly is to grow ahead of the market.

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Utkarsh Mehrotra, JP Morgan Chase & Co, Research Division - Analyst [27]

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Got it. That's very clear. Thanks for that. Secondly, just wanted to check on the Oceania business. You mentioned the big difference came in from New Zealand in the fourth quarter because of the price increase. So just wanted to get a sense of, let's say, in the next 2 to 3 years, apart from Vietnam, where do you see Oceania margins? Because you mentioned that international is one area where you see growth in 2019. And just any update on the issues that you'd highlighted last quarter on the Oceania/Australia business with healthy snacks doing much better?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [28]

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Yes, the -- so let's split into the impact of the pendulum swing to health was more of an Australian issue. On New Zealand, we were very conscious of 2018 as a year to fix the profit structure of that market. From '17 to '18, we began to cluster manage Australia and New Zealand together, tremendous focus on cost synergies, tremendous focus on efficiencies. So we're very pleased with the margin improvement that was delivered in New Zealand. And in fact, even though New Zealand for the entirety of the year was down on top line, it was a good profit driver for us for 2018. So now that the margin has been improved in New Zealand, we now expect that New Zealand would steady the ship in terms of top line growth. We have in fact have had a leadership change in New Zealand. We have a new managing director in New Zealand. And the expectations with a change of leadership there is now that we would go and grow in New Zealand. The OND quarter was an encouraging sign already that some of the issues that plagued us in the early part of the year is abating. And as we look at sequentially -- even from October to November to December to January to February, we're seeing improvement sequentially. So that's on New Zealand. We are encouraged also by some of the cross-pollination that has happened. We have brought the very strong Kettle brand that we have in Australia to New Zealand. That has gone down very well. That is added to our salted snacks category in New Zealand, which is quite important because New Zealand is very heavily a biscuits-driven business for us. Griffin's is led by -- a large part of our portfolio is very dependent on biscuits. And therefore, the addition of some of the Australian snack brands into New Zealand have started out well. The health trend is also present in New Zealand. So there is some degree of premiumization going on, which we like. It plays well to some of our portfolio strengths. Australia, still a little bit too early to tell. I think we've been working with the trade there. I think conversations have been positive. I think people understand that swinging the pendulum too much from mainstream to health -- we believe in the development of the health segment. Our portfolio has elements of that as well. But I think the conversations with the trade are moving in the right direction. And there is some degree of rebalancing that we see that would probably recover the growth rate of the snacks category in Australia. So it's not all the way back yet to the years where we were seeing 5% to 7% growth in the categories. But I'm hoping that we've reached a bit of a trough and that the trade understands that being unbalanced in support levels into the subsegments of snacks is not good for the entire category, nor is it good for the retailers themselves.

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Utkarsh Mehrotra, JP Morgan Chase & Co, Research Division - Analyst [29]

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Got it. Very, very helpful there. Just one last thing from me on Vietnam, if I may just check. So you mentioned the margin trajectory, but just wanted to understand, given the mix is also growing for the snacking products that you've introduced there, could you remind us of the margins in that category, whether that similar to Philippines or lower than that, and any idea on RTD as well in terms of margins?

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [30]

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Sorry, we're not breaking out margins to that level of detail. I don't have that, but I don't think that it would be appropriate for us anyway to publicly disclose to the specificity of those margins. The markets I think all behave in a very different fashion from one to the other. The scale of the Philippines is very, very dramatically different from that of Vietnam. So they're really not very comparable anyway to start with. The product mixes are also very different. We have a very, very small portfolio of snacks in Vietnam. And we've got a much wider portfolio in the Philippines. Our core snacking traverses all the way from potato chips to corn chips all the way to biscuits, wafers, pretzels, chocolates, candies, and it's just not going to be a very helpful comparison.

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Operator [31]

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Thank you. So we do not have any further questions at the moment. I would like to hand the conference back to you. Kindly take over.

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Irwin C. Lee, Universal Robina Corporation - CEO, President & Director [32]

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Okay. Thank you very much. And we look forward to our next earnings call. It will be the end of April. And by then, we would have the audited results of 2018 reconfirmed based on what we have discussed today and hopefully will be in a good place in reporting our first quarter results. So see you all in April.

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Operator [33]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect now. Good day to all.