KT&G Corporation (033780.KS) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, I'm Kate Park, Head of Investor Relations at KT&G. Thank you for attending KT&G's 2025 Second Quarter Earnings Report. Today's presentation will be provided in English in simultaneous interpretation and the Q&A session in consecutive interpretation. The materials can be found via the live webcast screen or downloaded from the company website. Please allow me to introduce the KT&G management team in attendance today. With us, we have Mr. Sang-Hak Lee, Chief Finance and Operating Officer; Mr. Chang Gu Hao, Chief of Strategy and Planning; Mr. Min Seok Gwon, Chief of Global Business; Mr. Young-Chan Yoon, Chief of Marketing; Mr. Tae Wa-Hong, Chief of NGP; Mr. Sung Jun Wu, Chief of Real Estate Business; Mr. Yong-Beom Kim, Head of Finance Office; and Mr. Tae Won Kim, Chief of Future Strategy at KGC. Please be advised that the earnings we are about to present today have yet to be audited by the outside auditor, therefore, are subject to change in the audit process and any forward-looking information discussed in the call today may differ from the actual results to be reported in the future. We will begin with key items from our consolidated earnings and then move on to each business segment. The presentation will be followed by a Q&A session with the management team. I will first invite Mr. Sang-Hak Lee, our CFO and COO, to share with you updates on our shareholder returns as resolved by the Board of Directors today, please refer to Page 3.

[Interpreted] Ladies and gentlemen, I am Sang-Hak Lee, COO and CFO of KT&G. I would first like to extend my gratitude to our shareholders and investors for your support and interest for KT&G. Today, our Board of Directors resolved for the execution of the interim dividend for 2025, along with a round of share buyback and cancellation. First of all, for the interim dividend, the Board has resolved to reflect the robust growth in our first half performance while maintaining balanced dividend metrics, including the payout ratio and the yield by increasing the dividend by KRW 200 to KRW 1,400. The dividend record date will be the 22nd of August, and the dividend will be paid out on September 8. Please refer to our website for further details. Going forward, we will consider further capacity to pay out dividends opened up by share buybacks, share price performance and our profit growth trend to continue to keep our dividends on an upward trajectory. The Board also authorized the share buyback and cancellation of KRW 300 billion. The company will begin repurchasing shares from the market as of tomorrow and end the process when the total amount of KRW 300 billion is depleted as per relevant regulations and the shares will be canceled immediately after. This is part of the KRW 1.3 trillion share buyback program from 2024 to 2027 and completing this round will put us at about 53% progress versus the plan. We will continue to fulfill our mid- to long-term shareholder return plan as announced. Furthermore, regardless to this round of shareholder returns, when we have the proceeds from the liquidation of noncore assets in progress, we will use the funds for additional return. Amid a rapidly changing business environment with increasing uncertainties, KT&G continues to be laser-focused on the core business, global business competitiveness as well as quality-centered growth with expanded profits. And we will spare no effort in enhancing corporate value while executing top-level shareholder returns. I ask for unwavering support from our shareholders and members of the capital market. Thank you. And now we will move on to the second quarter performance. Please refer to Page 4 for the key takeaways. Solid growth continued in the second quarter, allowing our first half revenue to surpass KRW 3 trillion for the first time. This was driven by strong growth in Global CC and higher real estate earnings. Our global cigarette business broke the record once again for quarter volume and revenue as it sustained the robust growth momentum. Volume grew in key regions, including APAC and Latin America and as continued pricing and product mix improvement drove up the ASP, the business saw 9.1% volume growth, 30.6% revenue growth, 51.1% growth in adjusted operating profit. The HFF business created profit center results as per our efforts for structural improvements. Restructuring the business portfolio towards high-profit channels and products, bringing efficiency behind marketing activities led to improved profits. As we strive for further profit expansion in the second half, we will aim to achieve double-digit growth in annual operating profit. Sustained growth momentum in Global CC, combined with better global cost competitiveness is expected to bring better profitability for the company. I will move on to Q2 consolidated results on Page 5. Q2 consolidated revenue was supported by strong growth in Global CC and improved earnings in real estate to rise 8.7% Y-o-Y to KRW 1.5479 trillion. Global CC profit expanded to drive up Q2 operating profit by 8.6% to KRW 349.8 billion. As for net income, currency fluctuations in the quarter led to lower currency-related nonoperating profits, driving income down by 54.1% to KRW 143.5 billion. This led to a 51.1% reduction in EPS to KRW 1,328. EBITDA rose by 9.7% to KRW 421 billion with EBITDA margins at 27.2%. Next to Page 6 on reasons behind the movement of our earnings. In the tobacco business, a high base from the allowance reversal in the previous year was a KRW 95.8 billion minus in cost variance, but product mix improvement and pricing added KRW 83.6 billion. Volume growth from the Global CC business added KRW 10.2 billion and appreciation of the dollar against the won was plus KRW 7.4 billion, amounting to a total of KRW 5.4 billion growth in profit from tobacco. The HFF business saw results from optimizing marketing activities, adding KRW 7.2 billion to profits. And the real estate business saw higher revenue from development projects, adding KRW 14.8 billion. All these factors combined drove up consolidated OP by 8.6% year-over-year. I would like to move on to earnings from each business segment in Page 7. First, on the tobacco business. Tobacco revenue for the quarter was driven by Global CC with new quarter revenue records to rise 10.2% to KRW 1.09 trillion. As profit continues to expand for global cigarettes, tobacco operating profit is growing strong as well. However, the high base from the allowance reversal in the last year diluted the operating profit growth for this quarter. And this led to adjusted operating profit still growing in double digits. Share of global business in the quarter continued to grow, thanks to expanded coverage and volume in Global CC to rise 3.0 percentage points to 62.6%. Let's go to each tobacco segment in Page 8. Starting with domestic CC. Domestic cigarette market volume continued to decline in Q2, partially impacting our revenue, while we continue to launch new products catering to consumer needs, sustaining our market share gain. Next to Page 9 on global cigarettes. Q2 global CC volumes grew especially in key regions like APAC and Latin America, showing a 9.1% growth to 60.7 billion sticks. Pricing and higher contribution from premium products continued to boost the ASP, reaching record volume and revenue at the same time. Moving on to Page 10 with NGP. In Q2, NGP revenue continued to be impacted by the device supply chain issue, leading to KRW 196.1 billion, similar to the previous year. Let's go deeper into domestic and global NGP numbers in Page 11. Domestically, heightened demand for NGP accelerated the category's market penetration. And despite increased competitive activities, including new product launches and aggressive marketing, the consistent growth of Lil Aible drove further expansion in our market share. Globally, coverage expansion in Russia enabled a rebound in quarter volumes, demonstrating resilience in a difficult environment. Next to Page 12 on HFF. Q2 HFF revenue was impacted by a business portfolio restructuring towards high-profit channels and products dipping slightly year-on-year. However, optimizing marketing execution and other profit center strategies took effect, allowing for Q2 operating profit to pick up back to the black. Share of global sales in HFF was reduced due to lower revenue from Greater China. Breaking down domestic and overseas performance in Page 13. Looking at revenue by channel in the domestic business, online platforms and other high-profit strategic channels grew in revenue by 43%, while the overall market slowdown in HFF and restructuring of low-profit business and products drove down offline revenue. All in all, domestic revenue was reduced year-on-year. In global revenue, large supermarket channel coverage expansion in the U.S. and Japan and establishment of new products were more than offset by a reduction of inefficient promotions for quality growth with overall overseas revenue down along with Greater China. Lastly, to Page 14, earnings from real estate. In real estate revenue, construction progress and development projects, including Anyang, Mia and East Daejean led to higher revenue recognition to KRW 143.7 billion. Such increase in development project revenue also contributed to higher profits with Q2 operating profit growing to KRW 17.7 billion. With that, we conclude our presentation for KT&G 2025 second quarter results. We are now happy to take your questions.[ id="-1" name="Operator" /> [Foreign Language] The first question will be provided by Eunae Ryu from KB Securities.

[Foreign Language] Before asking the question, congratulations on achieving that KRW 3 trillion earnings in the first half. I have 2 questions. First one relates to the fact that you have high base of the revenues coming in from global CC. I would like to understand, hence, what your outlook is as you move into the second half of the year? And would you be able to sustain that growth going forward? Second question, the Korean government has decided to pass out the social relief vouchers in order to trigger economic recovery. I would like to understand whether that will have and what type of an impact it will have on your tobacco business as well as KGC earnings.

[Foreign Language] Responding to the first question, I am Gwon Min Seok, the Chief of Global Business regarding the second half outlook as well as whether we will be able to sustain the growth. Under the new leadership at the company, we've been implementing a pricing policy. And since then, we -- starting the second quarter of 2024 for the global CC business, we've been able to record above 30% of top line growth as well as a very high profit growth as well. We've been able to sustain that uptrend. So admittedly, the current level, the base is, yes, it is quite high, but we do expect that even in the second half of the year, we will be able to sustain a solid growth trend. Basically, we believe that there will be a further increase in the volume, thanks to a strategic increase in our export unit price and improvement of the product mix as well as expansion of the coverage. And also, as we set up an end-to-end local integration in each of the local markets, we expect to be able to reduce the cost base as well. Upon these basis, our projection is that for year 2025 in terms of both top line revenue and operating profit, we will be able to continue on with a double-digit growth.

Responding to the second question, I am Chief of Marketing, Yoon Yeong Chan. If you were to look at the impact that the social relief coupon will have on our business, which was started in July of this year, we could look back to the COVID pandemic period where there were relief supports that were given out to the population. And based upon that, we can project that there will be a short-term impact in terms of expansion of the demand, which will eventually have impact on driving up our top line revenue. So if you look at the initial results from the monitoring of the first week monitoring that is, we were able to see that there were increases in the number of devices that were sold. And eventually, we think that this would lead to increases in the sales of the NGP sticks.

[Foreign Language] I am Kim Jin-Han from KDC. I'm Chief of Future Strategy. If you look back to May of 2020, quite similar to when the COVID support was given out, we are, hence, looking forward to stimulation in the domestic consumption, just as is the case for the domestic CC business. And at the time when the disaster relief payments were made during the family month promotion period, the daily revenue from road shops had actually gone up by 22% and annual revenue increase was reported to be around 10%. So for this time around as well, in order to make sure we leverage the stimulation in the consumption and demand, we are in the process of running brand campaigns for each of individual brands and also undertaking promotions, mostly focusing on the road shops for the months of July and August. And if we look at the result of the monitoring in the first week, we are seeing signs of increases in the road shop sales. [ id="-1" name="Operator" /> [Foreign Language] The following question will be presented by Jung Wook Lim from Meritz Securities.

[Foreign Language] I would like to gain some more color on your future dividend policy direction. You did share with us your shareholder return decisions. Would like to know as we go into the second half or the year-end dividend basis, would there be any increases? And if you could also share with us the extent of that increase, that would be also helpful. Second question is, can you update us on the progress of the divestment of your noncore assets? And also, you did mention the proceeds from that sales will be used as resources to -- for further shareholder return. And if you could also share with us what the size is, that would also be helpful. Third question is with the fluctuation in the FX rate, what impact is that having on your P&L, especially what your outlook is for the second half?

[Foreign Language] This is Lee Sang-Hak, I'm Chief Finance and Operating Officer. Just to once again summarize what the resolution was in today's BOD. For the first half of the year, as you know, our business earnings have been quite solid. So today, we resolved to increase the dividend per share by KRW 200 compared to last year's interim dividend, which is KRW 1,200, bringing us to this year's interim dividend of KRW 1,400. And on a year-end basis for last year, the figure was KRW 4,200 for your information. Now going forward, we will continuously be engaged in share buybacks so that we can expand on our dividend payout resources. And on top of that, recently, we've seen our share prices show an upward trend. So we will also be considering for the dividend yield as well as we make -- as we go forward and make decision on the dividend payout. We will also be considering the profit growth that will come in the Q3 and Q4 as well. So we will be -- basically, the company's position is to come up with a dividend payout plan in consideration of the factors that I have just mentioned.

[Foreign Language] I am Huh Chang Gu, Chief of Strategy and Planning. Responding to your question about our liquidation of noncore assets as well as the potential size of additional shareholder return. Now in order to further enhance the efficiency of the assets that we own and also to strengthen shareholder value, we are in the process of divesting noncore assets that we currently own. So as of June of 2025, we've completed 46% out of the total amount of noncore assets that we were planning to sell off. So in 2025, if you look at some of our major assets, one of which is Euljiro Tower, we have shortlisted bidders through the competitive bidding process and entered into MOU with those shortlisted bidders. And currently, due diligence process is ongoing. And for Marriott Hotel located at Namdaemun, we have gone through the bidding process. And right now, we're under an evaluation phase. Now in terms of the buildings, rental buildings and commercial real estate as well as some other regional-based locations, we are speeding up the process of optimizing and divesting these noncore assets and the cash flow that is generated through such sales will be used as resources for shareholder return. Now having said that, with regards to the size and the timing of that additional shareholder return, it will fluctuate depending on the changes in the market. So when we make that decision, we'll make sure that we'll come back to you and communicate to the capital markets in an expeditious manner.

[Foreign Language] This is Kim Yong-Beom, Head of Finance Office. Responding to your question about the impact from the FX fluctuation. At KT&G, when there is KRW 10 change in the won to U.S. dollar FX rate, there's an impact of KRW 5.3 billion on our operating profit and FX translation gain and loss of around KRW 16.3 billion. That is based upon our estimation. Because of uncertainties, both external at this point, it's quite difficult to make an accurate projection as to how the FX rate will move forward. And hence, the impact from that is also undetermined at this point in time. However, the company, in order to minimize the volatilities that come from the changes in the FX rate, we leverage FX forward products. And also in line with our internal guidelines, we do adjust for the timing of the inflow and outflow of foreign currencies through which we are hedging against FX risk. [ id="-1" name="Operator" /> [Foreign Language] The following question will be presented by Jay Choi from HSBC.