Edited Transcript of 2587.T earnings conference call or presentation 14-Feb-19 8:00am GMT

Next, I’d like to explain transformational growth. First of all, we will accelerate organic growth in Asia, a growing market, where we have already established business foundations. We also will constantly seek opportunities to expand areas and business models through proactive M&A and innovation. On top of these, we will take on a challenge to develop multinational brand. May Tea has been steadily growing since its launch in France in 2016. We will continue our effort to roll it out across Europe. Furthermore, we will develop products, such as TEA+, which has grown into a popular brand with over 10 million cases sold in Vietnam, and Good Mood, which is a flavored water product that is growing steadily in Indonesia into Asia Suntory brands by expanding their sales areas across Asia. In order to drive these initiatives robustly and swiftly, we have decided to reform and strengthen the management structure.

First of all, Mr. Kazuhiro Saito, CEO of Suntory Beverage & Food Asia, is to become President and CEO of Suntory Beverage & Food Group. Three years ago, he supported the growth of the whole SBF group as the group CFO. After that, he took the lead in bringing Asia region onto growth trajectory as CEO of Suntory Beverage & Food Asia. I will become Chairman of the Board and CEO, and I’m determined to break through the current difficulties together with the new CEO, Mr. Saito. Mr. Shekhar Mundlay is to become CEO of Suntory Beverage & Food Asia as Mr. Saito’s successor. He previously contributed to the business expansion of the joint venture with PepsiCo in Vietnam as CEO and currently serves as the Head of Beverage Division in Suntory Beverage & Food Asia, playing the pivotal role in successfully leading the growth of beverage business across Asia. With abundant experience, I believe, that his ability will not only be highly useful in leading Asia business but also for the business growth in emerging countries.

Last year, we newly appointed Mr. Josuke Kimura as the Regional Head of Japan Business and Mr. Peter Harding as the regional Head of Europe. With such reinforcements of management structure, we, as the management team, will work together to drive reconstruction of profit generation force and transformational growth robustly and swiftly.

Next, I’d like to explain the forecast of FY 2019. Forecast for revenue is JPY 1,313.0 billion. Operating income is JPY 110.0 billion, and profit attributable to owners of the company is JPY 66.5 billion. While revenue forecast is set at a higher level than the results of FY 2018, operating income is forecasted to decrease by JPY 3.6 billion. Operating income includes JPY 2.6 billion increase on organic basis and reversal of approximately JPY 4.0 billion in impairment loss recorded in 2018, which has positive effect. On the other hand, approximately JPY 12.0 billion of gain on sale of food and instant coffee business recorded in 2018 will have negative effect in 2019. As a result, overall operating income is forecasted to be lower than the previous year. Net income is forecasted to decrease by JPY 13.5 billion compared to the previous year because there will not be nontaxable gain on sale of food and instant coffee business and tax reduction effect that we had in 2018.

As for dividend, we plan annual dividend of JPY 78, same amount as the previous year by applying a higher payout ratio than usual. Although, the business environment is expected to remain tough this year, we are determined to make 2019 a year to build a more solid business foundation for sustainable growth by pushing reconstruction of profit generation force and transformational growth. That is all from me.

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Yuji Yamazaki, Suntory Beverage & Food Limited – Senior Managing Executive Officer & Director [2]

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This is Yuji Yamazaki. I will provide further details on the financial results of FY 2018 and the forecast for FY 2019.

Please turn to Page 12. First, I will explain the financial results of FY 2018. As Mr. Kogo mentioned earlier, 2018 revenue and operating income were higher than revised forecast on organic basis. Particularly, operating income in the fourth quarter, increased by JPY 0.8 billion compared to the previous year on organic basis. Considering that, we saw continuous profit decline up until the third quarter, I believe that we are gradually seeing positive outcomes of structural reform. On the other hand, overall operating income underperformed the revised forecast by JPY 4.4 billion due to unexpected impairment loss and restructure cost, et cetera. I will explain main factors of the differences between revised forecasts and results in the next slide.

Please turn to Page 13. First, I will talk about the main factors which caused the difference in operating profit. Impairment loss and restructure cost. Regarding impairment loss, every year, we run impairment tests as part of the full year closing process and record impairment loss and its reversal. For the fiscal year under review, we recorded approximately JPY 4.0 billion of impairment loss in total. I will explain further details. First, impairment of certain brands in Spain. Specifically speaking, impairment of brands, such as La Casera, a traditional carbonated beverage in Spain and Trina, a fruit juice drink, was deemed necessary based on the recent sales trend. The total amount of their impairment is approximately JPY 2.0 billion. Second, impairment of Nigeria business. The scale of impairment is also about JPY 2.0 billion. We acquired this business in 2016, but the economic condition and cost of goods sold deteriorated due to depreciation of the local currency, naira. Impairment was deemed necessary as it turned out that it would take longer to achieve the goals we had set upon acquisition. We are currently rebuilding the business by establishing a new management structure through updating the leadership. In addition to impairment loss, restructure cost was another main factor that pushed down operating income.

At the end of last year, we carried out management reform in Europe, specifically in Spain, to prepare ourselves for 2019. We also reconstructed the business structure in Africa. Costs entailed in these actions were recorded.

Second, I will explain net income. At the end of 2018, the Netherlands decided to reduce the corporate tax rate in the future. Reversal of deferred tax liabilities was recorded accordingly, reflecting the tax reduction effect to net income of the fiscal year under review. This offset the underperformance of operating income. As a result, the net income increased and was in line with the forecast.

Please turn to Page 14. Revenue and profit by segment. I will quickly explain by region.

Please turn to Page 15. First, Japan. Core brands performed well in 2018. Suntory Tennensui has become the #1 brand in domestic soft drink market for its annual sales volume, and BOSS achieved an annual sales volume exceeding 100 million cases for the first time since its launch. While the volume growth in overall beverage market is estimated to be around 2% year-on-year, ours increased by 4%. Meanwhile, revenue grew only by 2.8% due to adverse product mix. Supply chain cost increased due to lack of in-house production capacity, natural disasters and increased raw material price. Furthermore, increase in personnel expenses negatively impacted operation cost of vending machine business. As a result, segment profit decreased by 8.1%. However, both revenue and profit were higher than revised forecast.

Please turn to Page 16. Next, Europe. In 2018, core brands and May Tea performed well in France. And Lucozade Energy in the U.K. started to recover its trend in the second half. Schweppes struggled in Spain due to decline in market but overall revenue in Europe was flat year-on-year on a currency-neutral basis. On the other hand, segment profit was lower than the previous year and almost in line with, but slightly missed, the revised forecast because of the sales decline in Spain, even on organic basis, excluding one-off factors, such as impairment loss.

Please turn to Page 17. Next, Asia. In 2018, Vietnam performed well, and the integration of the joint venture established in Thailand went as planned, resulting in significant growth of the beverage business. Revenue was higher than the revised forecast, and profit was mostly in line.

Please turn to Page 18. Oceania was impacted by price hikes of raw materials, but revenue was almost flat year-on-year on a currency-neutral basis, and increase in segment profit was secured. Profit was also higher than the revised forecast. In Americas, overall revenue sustained at the same level as the previous year on a currency-neutral basis through actions, such as strengthening carbonated beverage category. Profit was down from the previous year due to the increase in raw material costs and personnel expenses. Both revenue and profit were higher than revised forecast.

Please turn to Page 19. Next, I will explain FY 2019 forecast. Please turn to Page 20. As Mr. Kogo explained earlier, we are determined to make 2019 a year to build more solid business foundation for sustainable growth by vigorously carrying out structure reform under the new leadership. We are forecasting increase in revenue, but unfortunately, operating income is expected to decrease due to one-off positive factors, such as the gain on sale of food and instant coffee business that we recorded in 2018. However, we are forecasting increase in profit on organic basis.

Please turn to Page 21. This is forecast by segment. I will explain more details by region in following pages. Please turn to Page 22. First, Japan. Due to the anticipated reversal from 2018 heatwave, overall beverage market is estimated to decline slightly in 2019. But we are forecasting our sales volume to be flat year-on-year. In addition, we aim to achieve flat revenue year-on-year by preventing further deterioration of product mix. As for profit, while situations continue to be tough, including factors such as rising raw material price, we aim to achieve the same level as previous year by price increase of certain products. Although we still have lingering issues carried over from 2018, such as adverse product mix, supply chain cost increase and higher operation cost in vending machine business, positive outcomes of structural change are starting to show in some areas, such as recent improvement in sales trend of FOSHU products and 185-gram Canned Coffee. We will continue to pursue structural change for better profitability in the medium term.

Please turn to Page 23. The focus areas covered in the structural change in Japan remain unchanged from what we have explained in the earnings release for the second quarter. Each of them is medium-term initiative, which will not complete immediately, but we will accelerate the implementation in pursuit of better profitability. In this section, I’d like to explain the initiatives that are expected to deliver outcomes in 2019.

First, establishment of high added value and profitability business model. This includes development of new business models through innovation, but for this year, we expect to see results in product mix improvement.

Last year, profit was negatively impacted by decreased sales volume of FOSHU products, such as Tokucha. This year, we will strengthen marketing and sales activities to prevent further downward trend of overall FOSHU and functional beverage category. In addition to that, we will raise prices for certain products in May. With these initiatives, we are aiming to prevent further price decline.

Next, SCM structural innovation. This initiative is not only about enhancement of production capacity. It is a wide-scope, medium-term initiative ranging from procurement to distribution. As part of it, a new production line in Ujigawa plant will be completed this year. Until then, our production capacity continues to be tight, but we will take on further cost reduction by introducing AI and other majors, aiming to achieve better profitability.

As for vending machine business, we will take actions, such as enrichment of coffee product lineups and improvement of operational efficiency through more installments of vending machines with wireless device to maintain sales and control cost pressures. I will explain a little more details on why profit forecast is kept flat year-on-year despite these profit-generating initiatives. Let me start with factors that potentially bring negative impacts on profit in comparison with the previous year, first, stagnation in sales growth due to reversal from heatwave in last year; second, expected continuous price hikes of raw materials; and third, continuous increase in vending machine operation cost due to rising personnel expenses and others. On the other hand, even in such environment, there are positive factors for profit, first, not having one-off cost from natural disasters, which we had last year; second, outcomes from continuous cost reduction activities that are expected; third, enhancement of profitability by structural change as mentioned earlier.

Under such circumstances, as we planned for 2019, we consider it is difficult to sustain the profit at the same level as the previous year without price increase. Price increase negotiations are underway that we cannot estimate the impact on revenue at this moment. But our firm determination to thoroughly implement every possible major on top of price increase in order to report higher profit than the previous year is reflected in this year’s forecast for Japan business. Above all, we are determined to make 2019 a year to build firm business foundation for future growth.

Please turn to Page 24. Next, Europe. As for revenue, while Spain is expected to continue to decline due to market condition, we will strengthen core brands, particularly in France and the U.K., and thus the forecast is slightly higher than the previous year on a currency-neutral basis. Segment profit is forecasted to increase.

In Europe, we will strive to recover and improve profitability under the new leadership.

Please turn to Page 25. Strategies for major countries in Europe are as shown.

Please turn to Page 26. Next, Asia, where we can expect the most growth in medium term. We forecast both revenue and profit to grow on organic basis, excluding the effect of the gain on sale of food and instant coffee business in 2018. Revenue is expected to grow through emphasis on core carbonated drinks and brands, such as energy drink, Sting; tea product, TEA+; and health supplement, Essence of Chicken; as well as expansion of low-sugar product portfolio in beverage business to meet rising health consciousness. Firm profit growth is expected on organic basis even with marketing investment for core brands.

Please turn to Page 27. Strategies for each business in Asia are as shown.

Please turn to Page 28. In Oceania, we anticipate high raw material prices to continue in 2019, but we are aiming to secure revenue and profit growth on a currency-neutral basis by strengthening core brands. In Americas, we anticipate the business environment to remain tough due to raw material costs and personnel expenses increase, but we aim to achieve flat revenue and profit year-on-year by enhancing core carbonated drinks and by positive effect of price increase we implemented last autumn.

Lastly, please turn to Page 29. I would like to explain our ESG initiatives. We uphold the promise to society in the form of Mizu to Ikiru, and we’ll continue to develop water-related activities. We are carrying out various initiatives in each ESG field by promoting diversity management and environmental management in addition to strengthening governance system as we expand our business areas globally. Such initiatives are highly regarded, and we are selected as constituent of the prominent ESG investment indices, namely FTSE4Good Index series and FTSE Blossom Japan Index. Particularly, water domain is at the core of our sustainability activities. And we have been rolling out various activities globally, including water resource conservation activities; Mizuiku, the education program for nature and water and forest conservation. Such activities of ours are highly regarded by the worldly renowned international NPO, CDP, that we have been awarded a position on the CDP water security A-list company for the third year in a row. In addition, we have adopted the environmental goals for 2030, which set out specific reduction targets for water use and CO2 emissions as part of our comprehensive approach to sustainability.

We would like to continue to promote our initiatives in ESG, even more robustly going forward. That is all from me. Thank you.