KT&G Corporation (A033780) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for attending today. We will now begin the conference call for KT&G's 2025 Third Quarter Earnings Report. [Operator Instructions]

[Interpreted] Ladies and gentlemen, I am Kate Park, Head of Investor Relations at KT&G. Thank you for attending KT&G's 2025 Third Quarter Earnings Report. Today's presentation will be provided in English and 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 management team in attendance today. With us, we have Mr. Sang Hak Lee, Chief Finance and Operating Officer; Mr. Chang Gu Huh, Chief Strategy Officer; Mr. Min Seok Gwon, Chief of Global Business; Mr. Yeong Chan Yoon, Chief of Marketing; Mr. Tae Hwa Hong, Chief of NGP; Mr. Sung Jung Hoon, 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're 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. With that, we will present our 2025 third quarter earnings. 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 key Q3 performances and updates on the business.

[Interpreted] Ladies and gentlemen, I am Sang Hak Lee, COO and CFO of KT&G. I would like to begin by extending my deepest gratitude to our shareholders and investors for all the interest and support you have shown for KT&G. Please allow me to share with you our key performance for the third quarter of 2025, the full year outlook, and our plans on the nicotine pouch business. First of all, KT&G has set a new record for quarter operating profit in 5 years, reaching highest ever revenue and profit at the same time for a quarter. This performance is a result of continued robust growth in Global CC and strong earnings across the entire tobacco business. With improved profitability in Health Functional Food and expanded profit in real estate on top of this, we were able to achieve double-digit growth in both revenue and operating profit on a consolidated basis. The Global CC business continued its streak of record high earnings for 3 consecutive quarters. Both volume and ASP grew in double digits and this drove quarter revenue up by 25% versus the previous year, surpassing KRW 500 billion for the first time. That being said, reflecting the growth trend that has continued into the third quarter, we are raising our full year guidance for 2025. Based on the strong growth momentum in the global market, we now anticipate our full year revenue and operating profit to grow by double digits compared to the previous year. And moving on to our plans for the nicotine pouch business. KT&G is materializing our entry into the nicotine pouch category, which is the fastest-growing category in the industry. In September, we executed a strategic partnership with Altria, the #1 tobacco company in the U.S. and signed a joint acquisition agreement for Another Snus Factory or ASF. ASF has established itself in the Nordics with high market share in Iceland, Sweden and Norway based on its nicotine pouch brand Loop. Starting from next year, we plan to engage in full-fledged global market expansion beyond the 5 Nordic markets going into Western Europe, Middle East, Africa, Asia and North America. Going forward, KT&G intends to enforce global business-oriented structural changes and business expansion to create a sustainable competitive edge and growth momentum to maximize corporate and shareholder value. I ask for your unwavering support for KT&G. Thank you. And now we will move on to the details of our Q3 earnings. Consolidated earnings on Page 4. Strong results across the tobacco business, including robust global CC growth, along with improved earnings in real estate drove Q3 consolidated revenue up by 11.6% Y-o-Y to KRW 1.8269 trillion. Operating profits were up 11.4% to KRW 465.3 billion. Net income was impacted by currency fluctuations in the quarter with higher currency-related nonoperating profits, driving income up by 73.4% to KRW 418.7 billion. EPS rose by 81.7% to KRW 389.8 billion. EBITDA grew by 12.3% to KRW 540.5 billion with EBITDA margins at 29.6%. Next is our reasons behind movement in earnings in Page 5. In the tobacco business, there was a KRW 100.4 billion increase in costs connected to the volume increase. The positive impact from a better product mix and pricing added KRW 34.1 billion in profit. Total cigarette and NGP stick volume increase was plus KRW 90.4 billion, and depreciation of the dollar against the won was a KRW 12.7 billion impact totaling to a KRW 36.8 billion increase. The HFS business that was operated under a profit-centered policy showed a KRW 2.7 billion increase. Real estate profits also rose by KRW 8 billion with progress in development projects. These factors combined led to a 11.4% year-on-year increase in consolidated operating profit. Next, I will move on to performance by business segment in Page 6. Starting with tobacco. Q3 tobacco business revenue was supported by global CC that once again broke the record for highest ever quarter revenue as well as strong results across the board with CC and NGP to rise 17.6% Y-o-Y to KRW 1.2323 trillion. Such revenue growth led to Q3 profit growth of 11% to KRW 371.8 billion. Meanwhile, the share of global business in tobacco continued to expand with a double-digit growth in global CC volume to rise 1.8 percentage points to 62.3%. Let's go into each tobacco segment in Page 7. Starting with domestic CC. We saw some advanced demand ahead of the long-term Chuseok holiday in early October, leading to increased market volume in domestic CC for the quarter. KT&G volume growth outpaced the market volume growth, which was a result of differentiated new product launches leading to strong market share growth with our market share for 9 months year-to-date surpassing 68%. Let's move on to global cigarettes in Page 8. Q3 global cigarette volume saw growth across all regions, including CIS, Latin America, APAC and Middle East, combining to 12.9% growth year-over-year to 18.42 billion sticks. Pricing and better mix with higher contribution from premium products drove ASP up by double digits, leading to 25% revenue growth despite the high base from the third quarter of last year. This was again a new record in quarter volume and revenue. Next to NGP in Page 9. Q3 NGP revenue was driven by new product launches and the catch-up supply of delayed devices for the first half to grow domestically and internationally to KRW 279.1 billion. Zooming in on details of domestic and international NGP numbers in Page 10. As for the domestic business, while the NGP category's penetration of the market continues, we are maintaining our market share at a stable level, addressing the intensified competition with new product launches. And in the global business, the launch of an upgraded version of low solid in Russia and the catch-up supply of delayed devices from the first half led to growth in both devices and stick volumes. Next, to Page 11 on Health Functional Food. Q3 HFF revenue was impacted by economic factors, including a subdued consumer sentiment and price pressure as well as continued portfolio restructuring towards high-profit channels and products with revenue declining versus the previous year. On the other hand, as COGS improves and the profit-centered strategy, including optimization of the marketing policy continues to show effect, Q3 operating profit grew Y-o-Y. Share of global revenue in HFF declined due to lower revenue from Greater China. Breaking down domestic and international numbers in Page 12. Looking at the revenue of each domestic channel, while revenue grew in high-profit strategic channels, including Duty-free and online, channel portfolio restructuring led to reduced off-line revenue from low-profit large distribution channels, including supermarkets and department stores. Overseas revenue declined due to reduced promotions. Next to Page 13 on real estate business. Q3 real estate revenue grew as higher revenue is recognized from development projects with construction progress in Anyang, Mia and East Deja to KRW 146.1 billion. As development revenue increased, Q3 operating profit saw a KRW 20.7 billion rise Y-o-Y. This concludes the KT&G Q3 earnings presentation, and we are now happy to take your questions.

[Operator Instructions] The first question will be provided by Eunae Ryu from KB Securities.

[Interpreted] I am Eunae Ryu from KB Securities. I would like to ask you 2 questions. First, you've raised your annual performance guidance. I would like to understand as to the rationale behind that adjustment. And based upon that, what will be your outlook for the fourth quarter? And also I would like to understand that in the third quarter, there was a significant increase in net profit. I would like to understand what the key driver behind that growth is? And also, what is your FX-related sensitivity, in particular with regards to the write-backs?

[Interpreted] Responding to your question, I am Sang Hak Lee, the COO of the company. We would like to respond to the 2 questions that you've asked first regarding the annual guidance, the basis upon which we've raised those guidance as well as talk about the outlook for the fourth quarter. As we've mentioned during the presentation, we've seen much stronger business come through from our global CC business, which drove our revenue a double-digit growth. Also in terms of our operating profit, we've seen adjustments taking place in our health functional food business and also the profits coming in from the real estate business as well as strong growth from our global CC business and NGP business, which actually drove the growth of operating profit in the extent of 11.4%. Based upon these drivers, we have decided to raise our annual guidance. So in terms of revenue, which previously was 5% to 7%, we've raised our expectations to above 10%. And for operating profit as well, our previous projection was around 6% to 8% growth. But we expect going forward, it will be in excess of 12%. What's important for us will be for the company to endeavor and really increase its efforts by twofold in order for us to achieve this raised guidance up until the end of the fourth quarter. And on the global CC business side, we will focus on increasing the ASP pricing, also improving the mix towards the high-end product so that we could continuously drive profit growth. Another important pillar will be for us to accelerate the improvement for our production and manufacturing framework, which focuses on the economics, basically improving on the cost base. So through such efforts, we will do our utmost to achieve the guidance that we have raised.

[Interpreted] To your second question, responding to your second question, I am Kim Yong Bong, Head of Finance. I would provide you with the reasons behind why we've seen such a significant increase in our quarterly net profit. I would also like to talk about the FX sensitivity. On top of the operating profit growth due to the fluctuation in the FX rate, we've seen increases in the foreign currency-related valuation gains, which significantly drove our quarterly net profit on a year-over-year basis. Because we have net position in foreign currency-denominated assets under which we own the escrow fund, which amounts to around USD 1.13 billion, when there is an FX-related fluctuation, that impacts our gains relating to foreign currency and that plays as an important driver in determining the movement in the net profit. So in terms of the valuation gains on our foreign currency-denominated assets, whereas as of end of the third quarter of 2024, the FX rate compared to the previous year's second and quarter, there was about 5% decline. But if you look at as of end of the third quarter of 2025 compared to the end of second quarter of 2025, there was an increase in the FX rate in the extent of 3.4%, which drove on a year-over-year basis, valuation gains of KRW 183 billion. So if we look at the impact that such FX rate movement has on the bottom line of the company, when there is a KRW 10 movement in 1 to dollar cross exchange rate, KT&G's annual operating profit is impacted in the extent of KRW 5.3 billion and FX-related translation gains and losses, the amount of impact will be around KRW 16.3 billion.

[Interpreted] The following question will be presented by Jung Wook Kim from Meritz Securities.

[Interpreted] I would like to ask you 3 questions. First has to do with your global CC business. I would like to understand as to the key driver behind such a great performance this quarter on your global CC business. And if you could break that down between the volume impact as well as the pricing impact. And also, if you could add on what the outlook is for the fourth quarter, that would also be quite helpful. Second question is, what do you -- what was the cost-related trajectory or the trend that you've seen in the third quarter? And what are your plans going forward in terms of cost savings? And my last question has to do with your nicotine pouch business. Can you give us an update as to the acquisition progress for your intent to acquire ASF? And also, what will be your global expansion strategy going forward for nicotine pouch?

[Interpreted] I am Kwang Min Choi, Chief of Global Business. I will respond to your question about the global CC business, the key drivers behind good performance in Q3 as well as shed light on what the Q4 outlook is. Now if you look at our global CC business, over 6 consecutive quarters, we've been able to sustain a double-digit growth on a year-over-year basis in terms of volume as well as ASP. In terms of volume, we were able to expand into the Russia as well as Asia Pacific distribution coverage has been expanded, which drove the year-over-year growth to around 12.9%. If you also look at our ASP, we've seen an even increase across all of the regions. And in particular, if you look at Asia Pacific, we were able to increase the sales of high-end products. We also made some adjustments in terms of the distributor network in Russia and CIS region. We also converted to local production and also we drove some savings from tariffs, and there was an impact from retail price increases. So all of these factors came together in driving the ASP up on a year-over-year basis by 10.7%. Now looking at the outlook for the fourth quarter, we will enter into new countries, including Jordan and Bangladesh through adopting an OEM and licensing model in the fourth quarter. There will be an increase in the unit prices as well as strengthening of our brand portfolio, particularly focusing on mid- to higher-end products. Through these efforts, our plan is to sustain the ASP uptrend.

[Interpreted] Yes. This is Head of Finance, responding to your question about the cost-related trend as well as our plans going forward for cost savings. Now if you look at the cost per p that we have seen over the past period where it was a low single digit, starting this quarter, it started to turn downwards. Now this is happening despite the fact that the tobacco leaf, which we purchased previous year, were inputed into our production in Q3, which drove up the cost for the raw materials, we were able to achieve stabilized cost basis for nontobacco materials, the NTMs, which helped us save on the processing and production cost. Now also, if you look at the sourcing cost for the imported leaves as of the third quarter, we saw a decline on a year-over-year basis by 5.6%, making a turnaround from 2024 statistics, which is a [ 16% ] increase. Now such change in the sourcing cost is going to start to have an impact on next year's manufacturing cost. Now as we've shared during the CEO Investor Day, we are in the process of expanding our global production base so that we can further improve our cost competitiveness from mid- to long-term perspective. Once we have in place and once we complete our global production basis that will help us nimbly respond to global demand. We will be able to enjoy lower labor cost compared to domestic as well as logistics cost and also save on the tariff-related costs and also benefit from standardization of the materials, localization and also expansion of the production volume, which will all translate into meaningful cost savings.

[Interpreted] taking your question, I'm the CFO. I will respond to your question about the current update on our acquisition of ASF and what our global expansion strategy is going forward. September 23, we entered into and executed an MOU so that we can together with Altria, acquire a nicotine pouch company called Another Snus factory, ASF, which is a company that is located in Northern Europe. We will complete the acquisition process before the end of the year, and we will focus our efforts carrying out the PMI post-merger integration process successfully, and we are planning on assigning our key talent as CEO and CFO in Sweden. Now in terms of our global expansion plan, ASF already has a top-tier market positioning, and it has strong competitiveness in Sweden and in Nordic countries. Upon that competitiveness, we are going to expand into other global markets, including Western Europe, Middle East, Africa, Asia and North America. And in so doing, we will leverage KT&G's capabilities for global distribution network and also leverage specialized distribution channels that exist in local and individual markets, we will find the most optimal route to enter these markets. We will, at the same time, make use of our unparalleled flavor technology to come up with a differentiated product portfolio, and we will take the high-quality premium image that Loop currently has and expand that into -- and further strengthen that into the global market. Through such strategies, we will make sure that we drive concrete results early on so that we can gain a benefit from such acquisition.

[Interpreted] the following question will be presented by Jaehyung Choi from UBS.

[Interpreted] I would like to ask 2 questions. I understand that aside from nicotine pouch, you also have other cooperation and collaboration with Altria in the domains of CC and health functional food, HFF. Can you give us an update as to how that cooperation is ongoing and what your plan is going forward? Second question, I understand that your Kazakhstan plant is going through ramp-up at this point. What is an update on that? And also, do you have some other production sites that you are currently planning to start commencing operation? And also, what would be your expected CapEx for 2026?

[Interpreted] this is Yoon Young-Chan. I'm Chief of Marketing. Responding to your question about our collaboration with Altria. KT&G has entered into a global partnership with Altria, which is the #1 tobacco company in the United States. We're working together to expand our global business portfolio in CC as well as HFF. Through such efforts, we want to further solidify our basis for growth from mid- to longer-term perspective. Now first, if you look at our tobacco business, we are currently working together to target and tap into original high-tar regular market where our competitors have a strong competitive edge. We're currently cooperating with Altria under a CMO model. And in Q3, we have released this plus product renewal and also released a new product HoSE. And by the end of this year, we are currently ramping up and preparing to release another high-end product. So by adopting the CMO method, we expect we will be able to reduce cost. And through various different efforts, we will rationalize our tobacco business operations, and we will continue with the collaboration.

[Interpreted] I am Kim Tae Won from KGC. I'm a Chief of Future Strategy. In the domain of health functional food, we are, at this point, running a product sample test. And in the first half of 2026, we're going to take our core product and have it go through market test and also expand on the market. And next year, we are going to co-develop together with Altria, to develop a customized new product that best fit the consumer preferences of the local market. We will be making use of distribution network that Altria has so that we can enter into the key channels of North America in phases.

[Interpreted] this is the CSO responding to your question about our Kazakhstan plant and our future commencement of operation plans for other overseas plant as well as for 2026 CapEx. Now our Kazakhstan plant was completed back in April, and it started its commencement. And this plant was set up with the purpose of ensuring supply stability in the CIS region and to gain competitiveness in terms of cost base. And right now, this plant is supplying products to neighboring countries, including Russia and Uzbekistan. What we are projecting is that for this year, the production will be up to about 70% of the capacity, and this will drive downwards the labor cost and logistics cost, which will help us improve on profitability. Once the utilization and run rate of the plant becomes more stabilized and once we see improvement in the production yield, we expect production efficiency will also further go up and the contribution to gross profit margin will also expand. Now for other production sites, in Indonesia, we recently completed a flavor capsule plant, and they've started and they've commenced their operations. And Indonesia #2 plant, which has the biggest capacity out of all of our overseas production sites that is expected to be complete -- the construction is expected to be completed around November and will start its commercial operations sometime February of next year. So Indonesia will serve Asia Pacific, Kazakhstan, CIS and European market and Turkey will be serving Africa and Latin American market. And about 50% of the total production volume will be produced from such global plants and global sites and will be supplied across the world. In terms of the CapEx, compared to the CapEx plan that we had announced amounting to KRW 2.4 trillion, the implementation rate by the end of the year will be around 80%. And CapEx spend, we expect is going to stabilize at around KRW 200 billion to KRW 300 billion. We think going forward, CapEx burden starting next year will go down. We will improve our capability in generating surplus cash, which will then be used as sources for shareholder return and for investment for the future. All of this will help us further solidify our financial position.

[Interpreted] the following question will be presented by Eunji Kang from Korea Investment & Securities.

[Interpreted] I would like to ask 2 questions. First is, what was the key driver behind the growth in revenue for your NGP business, which had a bigger impact? Was it the stick business? Or was it the device business? Second question is, we see that for the HFF market domestically, the Red Ginseng is being downsized. I would like to gain an update as to what your business strategy is. And we recently also heard that you will be taking your B2B business model overseas. Would like to know as to what your global expansion plan is.

[Interpreted] responding to your question, I'm Chief of NGP business. The reason why we've seen significant improvement in top line is because we were able to solve the supply chain-related issue for the devices in Vietnam, and we saw a double-digit growth for both domestic and global in terms of device as well as stick volume. So if you look at Q3, the overall NGP top line had posted a growth of about 45%. In terms of the Russian market, we've seen a very solid stick growth, reporting a 30% growth. And for domestic market for Lil Aible, we've seen year-over-year growth of around 40%, really contributing to a very sound bottom line position. Now in terms of the outlook, as we go into the fourth quarter, we will continuously upgrade the platforms that are the basis of what we are currently selling out into the market, and we will also continue to release new stick products as well. So for domestic market, we are going to leverage our biggest platform, the lil Hybrid and based upon that launch product. And for the Russian market, we will be introducing 2 new stick products as well. This will help us support the growth going forward. So on an annual basis, our NGP business will be supported in terms of revenue, operating profit and volume as well. We expect there will be a year-over-year growth.

[Interpreted] to your question on HFF, I am Kim Tae Won, Chief of Future Strategy at KGC. If you look at our strategic approach, basically, our focus will be on channel growth strategy based upon the brand portfolio that we have so that we can overcome the erosion that we are currently experiencing in terms of the profitability in the domestic health functional food market. At the same time, we are going to expand into the global market with a full-fledged endeavor so that we can achieve a turnaround. If you look at the domestic market, we will focus on our strategic channels, which include online and duty-free channel, so -- and upon which we will be reallocating the resources that we will use. And also by rationalizing the discount rate, we want to improve on the profitability. In the global market, we will focus on the so-called growth channels that is brand-centric and also achieve cost innovation. If you look at China, we are collaborating with a company, a local company in China, jointly developing products, and we will also strengthen our premium lineup of product offerings. In regions like United States and in Japan, through strategic alliances with large retailers, we will expand our market coverage. We will also diversify sources of our raw materials and make use of leading technologies in terms of -- from R&D perspective so that we can gain product competitiveness and drive up profitability so that come 2026, we may achieve a turnaround.

[Interpreted] Well, thank you very much. That brings us to the end of the third quarter 2025 KT&G earnings presentation. We thank you for your time. And if you have any unanswered questions, please feel free to contact us at the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]