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 2026 Second Quarter Earnings Report. [Operator Instructions] We will now begin with KT&G's presentation for 2026 second quarter earnings.

Ladies and gentlemen, I'm [ Erin Lee, ] Head of Investor Relations at KT&G. Thank you for attending KT&G's 2026 Second Quarter Earnings Report. Today's presentation will be provided in English and simultaneous interpretation and the Q&A session and 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. Young-Chan Yoon, Chief Strategy Officer; Mr. Chang Gu Huh, Chief Marketing Officer; Mr. Min-Seok Kwon, Chief of Global Business; Mr. Dong-Pil Kim, Chief of NGP; Mr. Sung Jung Hoon, Chief of Real Estate; Mr. Yong Beom Kim, Head of Finance Office; and Mr. Seungkyu Han, 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 subjective 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 begin the 2026 second quarter earnings report. Today's presentation consists of key items from our consolidated results and earnings for each business segment. After the presentation, we will proceed to Q&A with the management team in attendance. First, please allow me to invite Mr. Sang-Hak Lee, our COO and CFO, to share with you updates on our shareholder returns as a result of the Board today, highlights of our 2026 Q2 results and updates on our annual guidance.

Ladies and gentlemen, this is Sang-Hak Lee, COO and CFO of KT&G. Thank you for attending KT&G's 2026 Q2 earnings report. First, starting on our shareholder return. Earlier today, our Board of Directors resolved for the execution of the 2026 interim dividends. The Board has decided to raise DPS by KRW 600 to KRW 2,000 per share. The record date for this interim dividend will be August 21, and the dividends will be paid out on September 7. Details will be uploaded on our company website on a later date. Based on our profit growth and capacity for shareholder returns, we have increased the amount and the portion of our interim dividend and are assessing the possibility of increasing the DPS for our year-end dividend as well. And we will proceed with share buyback and cancellation in the second half as planned. The scale and timing of which will be decided based on comprehensive assessment of the market situation and our capital policy. We are also preparing for a new round of mid- to long-term shareholder return plan to transfer our elevated corporate value into shareholder value, on which our CEO will communicate with the market in the fourth quarter. And moving on to our key results of the second quarter. The robust growth of the tobacco business drove our consolidated earnings in Q2 as well. Consolidated revenue reached KRW 1.7 trillion, operating profit KRW 414.5 billion, rising 18.5%. With this, we recorded highest ever H1 revenue for 2 years and 4 consecutive quarters of double-digit growth in operating profit. Our international cigarette business recorded triple growth of volume, revenue, and operating profit for 9 quarters in a row. As the ASP growth trend continued through pricing and mix improvement, volumes grew 7.3%, revenue 18.9%, and operating profit 45.6%. Our NGP business reinforced brand competitiveness and profitability as the lil AIBLE platform successfully penetrated the market with higher contribution from high-ASP sticks leading to profit growth outpacing the revenue growth. In Korea, as the category's penetration increases, our market share rose to 48.2%, solidifying lil's market-leading position. Overseas, strong sales in key markets and a low base effect as the device supply chain normalize, led to 35.9% in revenue growth. To strengthen our platform competitiveness in heat-not-burn, we are investing in R&D twice as much as last year. In the second half, we will launch a new platform equipped with innovative heating technology in Korea and launch our HNB products independently in 2 markets overseas, all in line with our growth strategy. Our HFF business also continued its growth trajectory this quarter supported by promising results in Korea. Promotions maximizing market activation opportunities like the Family Month and individual brand campaigns led to a 7.8% revenue growth and double-digit growth in operating profit. Our Global Nutrition Business is also making significant attempts based on various partnerships. In China, we started to supply ginseng materials to a certain global F&B player in launching a new energy drink, which is currently being sold in large distribution channels. In the U.S., through our partnership with Altria, we have expanded our localized product portfolio with products going through pilot test in key retail channels. Reflecting our first half results and our projections for the second half, we are also revising up our 2026 annual guidance. We are now raising our revenue growth target from the previous 3% to 5% to 5% to 7%, and operating profit growth target from 6% to 8% to now 10% to 13%. We will do our utmost in the second half as well to achieve this guidance target as we maintain our profit-based growth trend. We ask for your unwavering support for KT&G going forward. Thank you. And now we will move on to details on our 2026 Q2 earnings in Page 6. In the second quarter, robust growth from our tobacco business drove consolidated earnings, while HFF and real estate businesses also grew. Consolidated revenue rose by 9.9% to KRW 1.7016 trillion. Operating profit growth outpaced the revenue growth, rising by 18.5% to KRW 414.5 billion. Net income was lifted by higher operating profit and currency-related non-operating profits, rising 152.3% to KRW 362.1 billion. EPS grew by 164.2% to KRW 3,509. EBITDA rose by 17.4% to KRW 494.4 billion, with EBITDA margins at 29.1%. Next to factors behind movement in earnings in Page 7. Starting with the tobacco business. Increase in volume from international CC and NGP sticks added KRW 43.1 billion. Improved product mix and pricing was a KRW 34.6 billion impact and dollar appreciation against the won was KRW 15.8 billion increment, totaling to KRW 60.5 billion increase in profit from the tobacco business. HFF and Real Estate also saw profit growth of KRW 3.8 billion and KRW 2.8 billion, respectively. As a result, consolidated operating profit grew 18.5% to KRW 414.5 billion. Let's move on to the results from each business segment in Page 8. First, on the tobacco business. Tobacco business revenue was driven by the strong growth of international CC and Korea NGP, rising 11.7% to KRW 1.2185 trillion. Operating profit was supported by Korea and international CC and the profit center growth of NGP to grow 18.8% with margins also growing 1.9 percentage points, too. Also, as business expanded via overseas CC, the share of international business in tobacco continued to rise to reach 65.1%. Breaking down the tobacco business into segments in Page 9. Beginning with international CC. Our international business continued its strong growth momentum despite the prolonged external uncertainties. In the Middle East, we managed to secure various alternative routes to see growth in both shipments and local sales volumes. Strong volume growth continued in key regions, including Africa and Eurasia. With it, total international sales volume grew 7.3% year-on-year to 17.92 billion sticks. ASP also maintained its solid growth with pricing and product mix improvement, leading to the international CC business recording triple growth of volume, revenue and profit for 9 quarters in a row now. Next to Korea CC in Page 10. In Q2, the total cigarette market volume decline was mitigated, shrinking only 1.2% Y-o-Y. We reinforced our market-leading position as we continue to increase our market share and minimized our volume decline to 0.6%, with our revenue rising 1.1%. Next is Page 11 on NGP. In the Korean NGP business, strong sales of the lil AIBLE platform led to higher contribution from high ASP sticks and improved profitability. Profit growth outpaced revenue growth as a result. International NGP was lifted by expanded sales in key markets, including Russia, and partial impact from the low base effect of the device supply disruption in the previous year. Allow me to elaborate on the performance in Page 12. In Korea, while the HNB category's penetration of the market continue to grow and competition intensified, the lil AIBLE platform and new stick products were well received in the market, recording 48.2% in market share for KT&G. In the international business, upgraded device launches in Russia, a key market, continued to show effect, leading to moderate growth in stick volumes. Next, on Page 13, the HFF business. With promotions for the Family Month campaign and individual brand campaigns in Korea, Q2 HFF revenue grew by 1.5%. As high-profit channels, including online expanded and costs improved, operating profit was boosted by 61.3%. Breaking down Korea and international in Page 14. In Korea, promotions for Family Month and high oil price relief subsidies and individual brand campaigns led to expanded sales across all channels with overall revenue rising by 7.8%. Overseas, reduced sales in China due to inventory adjustment led to lower revenue year-on-year. Lastly, on Page 15 for real estate. Real estate revenue grew as construction rates progress in development projects, including Anyang, Mia, East Daejeon, rising 10.2% Y-o-Y. Operating profit also grew by 15.8%, with higher revenue from development projects. This concludes our 2026 second quarter earnings release presentation. We are now happy to take your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Jung Wook Kim from Meritz Securities.

[Interpreted] I would like to ask three questions. First being, in the second quarter, we've seen that the natural erosion of your domestic combustible cigarette business had actually narrowed compared to the past. So I would like to understand as to the reason why and whether you believe that this trend will continue onwards into the second half of the year? Second question has to do with your NGP business. What do you think are the key success factors that's driving the growth of lil AIBLE, and also what's your outlook going forward? And the third question is, I would like to gain some more direction and guidance of the new shareholder return policy, which you will be announcing in the second half of the year.

[Interpreted] I am CMO, Huh Chang Gu. I will be responding to your question about the reason why we've seen a narrower decline in terms of the total volume. If you look at the total CC demand, it naturally eroded due to the decline in population, but also because the demand is shifting to other alternative products like HNB, heat-not-burn, and e-vapor products, there was around 4% yearly decline. But in the second quarter, if you look at the total demand, it was 14.5 billion sticks, which is down only by 1.2% versus last year. So you would see that the decline is narrowing. And we think part of the reason is because of the slower demand shift to synthetic nicotine e-vapor products following the amendment to the act on tobacco business, which took effect in the month of April. Having said that, we believe that it is, however, too early to say that this is a structural change, so we will closely monitor demand trend going forward as well as key drivers for change.

[Interpreted] Next, responding to your question about the key success drivers behind lil AIBLE and what our take in terms of the market outlook is for the domestic market. I am NGP Chief, Kim Dong-Pil. The company had expanded the rollout of AIBLE 3.0 in month of June, which is an upgraded version compared to the existing AIBLE 2.0 platform. If you take a look at this upgraded platform, it provided a better convenience to our users by reducing the preheat time and providing high-speed charging which received quite positive response from our consumers. As a result, we were able to see a very fast uptake in the sales of the sticks for lil AIBLE as well as the device. And out of the total stick market, the share of market has recorded 48.2%, and we were able to widen the gap with the #2 player by 3 percentage points. Going forward, our plan is to continuously strengthen the competitiveness of our existing platform, including that of lil AIBLE, and we will continue also to roll out more upgraded version of the platform in the NGP market, so that we can continue on with the growth momentum.

[Interpreted] Taking your question on the upcoming shareholder return program, which we will be sharing in the second half of the year. I am Lee Sang-Hak, Chief Finance and Operating Officer, responding to your question. As I've mentioned at the opening during the fourth quarter, the company will be announcing its new mid- to longer-term shareholder return program. Since we achieved treasury share cancellation target under the value of plan of November 2024 at 20% earlier than planned and expected. And in light of the increases in the share price that we are seeing and considering the payout ratio of our global peers, we're currently looking at developing shareholder return policy with a strong focus on strengthening dividend payout. Share buyback and cancellation will also be an important pillar of our shareholder return program, and we will implement the program considering the overall aspects, including market situation and effects on corporate value enhancement. Under such progressive stance on dividend payout, as the first step, we decided to increase interim dividend by KRW 600 and are also considering increasing the year-end dividend as well. We also increased the share of interim payout against the annual distribution so as to strengthen shareholder return during the calendar year.

[Interpreted] The following question will be presented by Eunae Ryu from KB Securities.

[Interpreted] I am Eunae from KB Securities. Today, I have two questions that I wish to ask. The first one has to do with your global CC business. In light of the strong dollar environment, what is your second half outlook in terms of the volume as well as ASP trend? My second question relates to the timing of when you're going to do your share buyback and when you will implement the cancellation of such treasury shares? And also, is there any possibility of you implementing the Plus Alpha program, which is for the non-core asset liquidation?

[Interpreted] Responding to your question. I am Kwon Min-Seok, Chief of Global Business. I will talk about our second half outlook for volume and ASP growth. If you look at our global CC business in the first half of the year, we also reported a double-digit volume growth as was the case back in 2024 and 2025. We've been able to drive growth not only around the new markets, which include Africa and Latin America, but also in countries where we directly engage in the business, which are Russian market and Indonesia. We've been able to achieve an evenly spread growth across these regions. If you look at ASP trend as well, even if you exclude the impact of FX movements in '24 and '25, we still were able to drive a double-digit growth, and we are expected to continue on with that robust up trend this year as well. By leveraging increases in the sales price, the ASP and improving the product mix, focusing on premium product, we are able to sustain the improvement in ASP trajectory. And hence, we believe that for '26 and '27 as well, we will be able to maintain a quite steady trend in terms of volume and ASP.