Monde Nissin Corporation (MONDE) Earnings Call Transcript & Summary

Good afternoon, and welcome to Monde Nissin's third quarter earnings call. I am Mike Paska, Head of Investor Relations. On today's call with me are Henry Soesanto, Chief Executive Officer; Jesse Teo, Chief Financial Officer; and Marco Bertacca, Chief Executive Officer, Quorn Foods. By now, everyone should have access to today's press releases and earnings presentation, all available on the PSE Edge website posted earlier today. This material can also be found in the Investors section on Monde Nissin's website. And finally, before we begin, please note that the financial information presented today is unaudited. During the course of the call, management may make forward-looking statements based upon current assumptions and expectations. These are not guarantees of future performance, and I encourage everyone to read the disclaimer in the presentation. With that, I'd now like to turn the call over to Henry for introductory remarks. Henry?

Thank you. Thank you, Mike, and good day, everyone. I'm happy to report that during the third quarter our APAC branded food businesses saw very strong top line growth both year-over-year and sequentially. Noodles, in particular, saw record volumes. Along with the strong growth, we saw a significant expansion in the gross margin of APAC BFB. Moving to the Meat Alternative business. We are one of the categories still facing headwinds. Despite this, Quorn managed to gain market shares and has successfully implemented business restructuring, enable us to maintain EBITDA breakeven for the second consecutive quarter. I would now like to turn the call over to Jesse to provide more details for our APAC branded food businesses. Thank you. Jesse, please.

Thank you, Henry. We are very pleased to present to you the Q3 results for the company -- Q3 and 9 months results for the company. As Henry mentioned, we have a very strong revenue progression with net sales growing 17.8% on the total business, highlighted by extremely strong 34% growth in APAC Branded Food & Beverage. As Henry mentioned, Meat Alternative continues to struggle on a top line basis due to the economic conditions in its key market U.K. But overall, the growth in Q3 has brought the overall company growth for the 9 months to 10.5%. The growth of APAC BFB is not only a growth versus a low base as quarter-on-quarter APAC Branded Food & Beverage grew 8.2%. And on a total basis, we grew 6.8% quarter-on-quarter. Gross margin, as Henry highlighted, grew significantly, 300 basis points on a total basis year-on-year and 150 basis points quarter-on-quarter. APAC had a particularly strong progression, while Meat Alternative is still struggling a bit on gross margin due to the low volumes. Between gross profit and EBITDA, there are 2 different directions that we've taken on SG&A. For APAC Branded Food & Beverage, we are investing in additional SG&A to fuel the growth momentum that we have. In Meat Alternative, from the restructuring activities that we have done, we have significantly reduced our SG&A in order to maintain the second consecutive EBITDA neutral results. The EBITDA performance flow through to net income and then to net income attributable to shareholders. Reported net income had a strong growth of 68%, basically from flow through from our core net income. Next slide, please. The growth in bottom line also translated to more cash. We generated PHP 7 billion in cash in the first 9 months compared to PHP 2 billion -- PHP 2.3 billion in the same period versus 1 year ago. That is more than triple the cash. Besides the increase in profits, we were able to lower the inventory value as the purchases of key commodities that we have, have significantly gone down. Moreover, last year -- whereas last year, we were paying down our U.S. dollar trust receipts for our wheat purchases because of the favorable USD-Philippine exchange rate. This year the exchange rate has not been as favorable in the last few months. So we were not paying down trust receipts as much. This results to a cash accretion of more than PHP 1 billion as our current September 30 cash balance is now up to PHP 13 billion. This is up despite the fact that we paid GBP 51 million of external debt. You will recall that we have announced a infusion of GBP 56 million into our MN U.K. business, GBP 51 million of which was used to pay down external debt. Despite close to PHP 3.5 billion of debt payment, our cash balances increased by PHP 1 billion, reflecting this very strong cash flow progression that we have. Next slide, please. APAC is a star, obviously, for this quarter, with revenue growth at 24%, and there are many all-time highs here. The growth is broad-based, as you will see later on. Q3 was an all-time high quarter with noodles, in particular, all-time high volume, and let me repeat, all-time high volume. And the sales progression does not stop at that. After delivering an all-time high quarter, we delivered an all-time high month in October. Even our Thailand unit, the domestic Thai business had a all-time high quarter 3. It's broad-based, and we will see that it's all good from a volume and from a pricing standpoint. The gross margin progression was even stronger if you look at only APAC, 520 bps of improvement year-on-year and 200 bps quarter-on-quarter. And later on, we will share with you the trends of our key commodities that would suggest that these good times will continue to roll. That translated to good performances in EBITDA and core net income. Next slide, please. As I mentioned, we are firing almost on all cylinders. If you look at our 9 month results, we're all green, all positive, both from a volume and from a pricing standpoint for all the key categories that we are playing in. The slight negative in Q3 for biscuits is due to the fact that, if you recall, we had a very weak quarter 3 for noodles because of the regulatory issue, and so we pushed the biscuit business during the same period. So it is a high -- very -- extremely high base for the biscuit business. But overall, strong across the Board, top line performance across all our categories, including Thailand and our export business. Next slide, please. Please indulge me a bit as we take you down -- a trip down memory lane on our noodles volume evolution. During the first quarter of 2020, this was the quarter where we experienced the first lockdown from COVID. We experienced extremely high volume for our noodles, a significant jump from the volumes of any of the -- versus any past periods because people were sheltering at home and preparing noodle pouches to feed themselves while they are at home, protect themselves from COVID. If you look at Q3 2022, this was a time when the regulatory issue happened. We had a voluntary recall in small parts in Europe, and it had a knock-on effect on our volumes in the Philippines. The volume for noodles at that time was 32% down versus 1 year ago. Less than 1 year we moved from that. We have bounced back strong. And in Q3, we have registered an all-time high volume quarter. This is backed by share growth. Next slide, please. As you can see, year-on-year, our share progression is significant. Of course, this is a low base. So we also endeavor to show you the quarter-on-quarter progression. Last quarter we reported a slight dip, but we have bounced back. The category itself also has a bounce back in the category growth. We shared that our business is highly correlated with rainfall, and it rained in quarter 3, and that really helped the business. The category grew from mid-single-digits to mid-teens because of the rains. As inflation sets in -- higher inflation sets in, we believe that -- the historical fact that our noodles business respond well during times of high inflation, will continue, and this bodes well for the continuous consumption for our noodle products. On specific products itself, I would just like to highlight our Kasalo pack. We talked about this that we -- previously, we did not play in this sizing and pricing segment. Today, our Kasalo business is already 5.4% share of the dry pouch. This is 45% of the leader in this sizing and pricing segment, just less than 1 year of national launch. We plan to use the same formula in the wet pouch business to offer a bigger size and price to use the same value for money offering to grow our business. In cups, seafood has been our weakness. So we have introduced a new variant, Shrimp Tonkotsu. It is a distinct seafood flavored cup noodle with a pork broth base. We hope to make some progress in our volumes and share with this introduction. For biscuits, we continue to be #2 in the category. A local player is leading -- is the market leader. We continue to grow, but the local player is growing much faster than us. In cracker sandwiches, in cookie sandwiches and sweet biscuits, we are growing, but we have some vulnerability in our cracker. We will have plans to address this vulnerability in the next coming months. For our culinary business, our oyster sauce remains to be a strong #1. We had some production issues in the last 6 months. Thus, we were not able to fully supply the demand, explaining the slight share loss. But the good news is we continue to grow the category, and oyster sauce now has 51% penetration in the Philippines because of our campaign for Filipinos to use oyster sauce in lieu of soy sauce. Finally, on our yogurt drinks business, we have now fully breached 90% and are riding the high tide of Filipino mom's preference for milk-based beverages for their kids. It is a strong share position in a strong -- in a category that is growing very strongly. Next slide, please. I mentioned earlier that we have variable gross margin progression because the commodity costs have gone down and our pricing has stopped. Those prices will continue to be low. For wheat, they are trading near 5-year lows, and we have substantially locked in near these levels. Our lock in for wheat is up to Q2 -- substantial lock in up to Q2. And for palm oil, we have lock in positions of 80% for Q4, 60% for Q1 and Q2 and 20% in Q3. The palm oil prices are not near all-time lows, but they are significantly down already from their peaks. If you look at the chart, you will see at least for palm oil, quarter-on-quarter, our palm oil costs will be lower than the previous quarter. If you add that to our lock-ins for power or energy, we announced previously that we have an F Gen contract where we supply most of our plants with renewable energy. We have very favorable rates. So we are well poised to be protected from any energy-related shocks in the future. Thus, this 500 bps improvement in gross margin, 200 basis points quarter-on-quarter, should continue on -- well into next year. Next slide. I'll now turn it over to Marco to talk about our Meat Alternative business.

Thank you very much, Jesse. Good morning, good afternoon. Can you please move to the next slide? So as Jesse and Henry already mentioned, we started from a continuation of quite a challenging environment, in particular, in the U.K. And this is why we are certainly making progress, but we are dealing also with the challenging circumstances in the overall market of Meat Alternative. I'm reporting therefore that our net sales quarter-on-quarter has declined by 4.2%. This is on the back of a volume decline of around 10%. This is also including, and maybe possibly driven also by the increase of pricing that we've done in a number of quarters. You can also see that our gross margin has declined mainly because of the big impact on the volume decline. On top of that, we have really implemented a number of measures. Already Jesse has shared the restructuring that we've done, a reduction of our cost base. And this is why despite these challenges in the market, we've been able to deliver for the second quarter at least a breakeven EBITDA while we are setting up for a strengthening of our overall business so that we get out of this challenging market with a positive growth in the future. But still, where we are today is -- you may have also picked up from other competitors is that it is not an easy place to be from the consumer perspective. Next slide, please. So here, I just want to dive into a bit of the U.K. environment that you can see on the U.K. economy. On the left, U.K. inflation is still very high and the food inflation is high, about 12.2%. There's a number of metrics that I could highlight. Interest rates are still high, and this is what is really putting pressure on consumer spending. Now the impact that these have on the reasonably new category like Meat Alternative is that the overall market is down 6.3%, while Quorn is only down 1%. So one of the key elements that is very, very important for us is to continuously strengthen our position in a challenging environment, and this is why you would see that we continue to improve our market share, in particular in the U.K., but also in the Nordics and in other countries. So you see other brands are down 5%, the private label market is further down 15%, the market minus 6.3% in Quorn, still negative by minus 1%. Next slide, please. So how are we -- as I said, within what we can influence, we continually strengthen our position. You can see on the left that now is a very strong quarter-on-quarter streak of improvement. We are now 33%. It's very important for us, is -- our home market is the U.K. So having a 33% is super important for us. On top of that, a recent survey from all the retailers have given us our #1 position in terms of the performance, in terms of customer service, availability, et cetera. So there is a strong recognition that Quorn is playing a very, very important role in the category. We are the #1 and we are becoming stronger in the category. Important also to reflect on the fact that our customers still see the category as an important game for the future for the short, but also meet a long term, and this is why we are really collaborating with them in terms of restarting the category. On the right, I just want to also confirm one of our successes has been clearly that -- our ability to continuously grow Foodservice, although at the lower rate that we had until now, but we're still in growth, also in Q3. This is despite the fact that, for example, there's fewer people going out and eating in the restaurant with the current situation. But not only the U.K. is strengthening the position in Foodservice, we're also expanding and taking a more regional and possibly global position in the Foodservice because we see that as a key area for us to grow. In fact, KFC Europe has continued to roll out the plans to take Quorn in more European countries, and we're currently present in 24 countries. So we are growing to food service not only with new customers, but also by selling more to existing customers. That's very, very important for us also because Foodservice is taking a bigger, bigger share of our total business in Quorn. Next slide. And I think I'll pass back to Jesse on this slide.

Henry will be making some opening remarks for this section first, and then I'll take you over after that.

Okay. Thank you. Thank you, Marco. Thank you, Jesse. Now I would like to talk about the second press release that we made this afternoon regarding the financial support that my family and I are providing to the company to reduce the implication of future value impairment at our Meat Alternative business. The Meat Alternative business has more than 30 years. This is -- Quorn has more than 30 years' operating history. So if you look at the chart, since the first product was sold in 1985, it has shown consistent growth, positive growth. It was the first time we got the value impairment and it was during the very difficult time of macro business environment. So we believe the difficulty situation is not forever, and it is reasonable to assume that the growth will come back in the medium to long-term. Under this difficult situation, we are doing as much as we can to weather the challenges. This undertaking is giving us time to focus on updating and executing our strategy, developing new products and new business models, while worrying less on the impact of the value due to the possible future impairment of the business. And it is good to mention that there is no limit on the upside potential in the future when the category and business recover. Additionally, at a group level, the Board can then later decide what to do when we have ongoing retained earnings sitting in our balance sheet. Now I will hand it over to Jesse again to explain the basic mechanics.

Thank you, Henry. Next slide, please. As a minority shareholder myself, I can say that this is an unprecedented generosity on the part of the family shareholders to provide this financial support on the Meat Alternative business. The way it will work is there will be a cash top-up for any impairment on the investment of our Monde Nissin Singapore Private Limited entity. This is the direct parent of our Monde Nissin U.K. entity. Right now, the investment of Monde Nissin Singapore into MN U.K. is in the form of both intercompany loan and direct [Technical Difficulty] investment. So that -- any of impairment on those remaining amounts as of January 1, 2023, until the end of the family financial support period of December 31, 2032, will be compensated by a cash top-up. This cash top-up will be provided for by MNSG. This is a Singapore domicile company owned by the controlling shareholders of Monde Nissin. And they are providing this top-up kind of put -- the non-deliverable put option to the -- our Monde Nissin Singapore entity. Monde Nissin Singapore entity is also 100% owned by the listco. The current VIU or enterprise value of the MN U.K. business can be written up or written down throughout this period. Goodwill has been -- as you recall, been fully impaired, and under accounting rules only goodwill cannot be reversed. All the remaining assets, both tangible and intangible assets, can now be written on or written off as assessed during the IAS 36 exercise. There will be a one-time settlement, if any, at the end of the term, and because of the financial process to determine the actual impairment as of December 31, 2032, we will only be able to finally publish it by April 15, 2033, and the payment to Monde Nissin Singapore Private Limited made on or before June 30, if any. In the interim periods, we will be doing mark-to-market assessments to adjust for both the IAS 36 on the enterprise value of our MN U.K. business and also on the value of this financial support. This financial support will be backed by collateral of 2.156 billion Monde shares owned by the family shareholders. And it will pick up at the value based on the average stock -- weighted average stock price of the 5 last trading days prior to December 31, 2032. This amount, which is in peso, will then be converted to sterling because the value of the business is in sterling. Now as to how the top-up will be funded, it will be funded by either existing cash of the family shareholders or if necessary, if the existing cash is not enough, we will be tapping on the collateral -- the proceeds from the collateral or the restricted shares. To make sure that there is no fake sale that will eliminate obligation of the family to the company, we have set forth some conditions. While we have said that the top-up obligation will only be valid if Monde Nissin Corporation is -- directly or indirectly retains control interest in MN U.K., right? And it is, I guess, a fair assumption -- a fair condition because if we are direct -- we are the -- controlling interest, then we control the fortunes of the business. We are putting in strict conditions on any sale. For any related party sale, there will be a floor price and the floor price will be the net investment as of January 1, 2032 -- sorry, January 1, 2023, plus all the investments that we will be making during the tenure of the financial support, minus the dividends that MN U.K. will be giving, its immediate parent Monde Nissin Singapore Private Limited, and buying us any intercompany loan payment. Any related party sale will have to meet that floor price. If it's a third-party independent sale, the sale will have to be endorsed by our risk and related party transaction committee, which is composed entirely by independent directors, if 2 conditions are met. First, if the value of the sale price -- if the sale price consideration is less than the net book value of the MN U.K. business, or if the proceeds from the sale will be less than the top-up obligation of the family of MNSG to MNSPL. Using the same rules, there could also be a minority sale. But with the minority sales since the MNC will still have controlling interest and decide the fortunes of the business, the only adjustment will be a pro rata adjustment. Let's say, there's a 30% minority sale. There will be a 30% reduction in both the top-up obligation and the restricted shares that will be applied prospectively. In conclusion, these financial support measures should protect minority -- all shareholders, particularly minority shareholders, from any downside risk in our Meat Alternative business, while, as Henry said, giving them all the upside opportunities for the recovery and participating in the very positive upward trend of our APAC Branded Food & Beverage business. This concludes our prepared remarks. We are now ready for questions.

Thank you, Jesse. So just as a reminder, questions can be submitted via your chat box. We will attempt to address as many as we can, time permitting. Jesse, first question is for you, and this is in regards to Q4. Q3 was a very strong quarter. Is there any color you can give us so far -- any additional color on how Q4 is going among the different segments?

Yes. For top line, as I mentioned, we were off to a very good start in October as we succeeded our all-time high quarter with an all-time high month in October. Bottom line, margin should continue to expand as pricing has stopped and our commodity cost has gone -- lock-ins are lower quarter-on-quarter, even versus the Q3 quarter. And you've also seen the projection that we are making all the way to Q2 and even Q3 for some of our commodities. By the way, just to update folks, I failed to mention this. Wheat and palm oil consists 25% of the COGS of APAC Branded Food & Beverage. And energy, which I also mentioned, has been locked-in, in a 5-year deal with F Gen, is about 4%. So overall, we are good. We're almost 30% of our COGS.

Jesse, we have another question, and this is regarding the top-up exercise. And does this exercise or announcement portend an imminent impairment exercise?

Well, the exercise for IAS 36 will happen at year-end. A lot of factors play too, including WACC. WACC was a major contributor for the impairment. Over 60% of the cost of the reduction in the VIU was due to the WACC. While there are certainly good news that the periods of interest rate hikes may be over, we don't know what the sentiments will be come December 31. So all of us will have to wait and see. But we don't want to wait for things to happen before we do anything. We want to be proactive. If we give the support and the support is not needed, then everybody should be good with it.

Another question, and this is regarding the financial support measure. What will be the immediate P&L impact to Monde, if any?

Well, I -- OCI booking of the time value of the option will be booked since it's booked as an asset in Monde Nissin Singapore. And OCI credit, there is no P&L impact, but there will be a direct-to-equity impact. And then we will have to do the mark-to-market based on the actual IAS impairment at the end of the year, the actual share price and use the actual variables that we see by year-end to do the mark-to-market by December 31.

This is another question regarding the Meat Alternative…

The initial day 1 entry is really just for the time value of the option, okay? The time value of the option will be booked as an OCI entry even as it creates the asset in the books of Singapore -- Monde Nissin Singapore.

This next question is regarding Meat Alternatives, and it's, how much restructuring cost was booked under OpEx of the Meat Alternative business as of the first 9 months?

Marco, do you want to take that one?

Yes. So I think the -- was about GBP 9 million, Jesse. So I think -- I wouldn't be able to make the translation immediately in pesos, but I think it's GBP 8.4 million precisely.

Yes. Call it, 70 -- multiplied by 70, about PHP 5.6 million -- PHP 5.60 million.

PHP 5.7 million -- PHP 5.60 million, PHP 5.70 million. Yes.

Marco, another question for you, and this is, how much did Foodservice contribute to sales in the first 9 months?

Well, Foodservice has been growing actually in relevance in the last few quarters, and we are now on a year-to-date at 16.5%. So Foodservice is becoming a clearly driving force for Quorn overall. And as I said, it's a growth area. So that's why we count and we are really doubling down on the Foodservice segment overall, not just in the U.K.

Jesse, this is a question regarding the impairment exercise. And can you remind us why there is an impairment exercise if the goodwill has already been completely written off?

Yes. So under IAS 36, which -- impairment rules, you do this exercise to evaluate not only intangibles but also tangibles. We still have substantial intangibles, by the way. The intangibles, as I shared last time, the brand trademark value is still GBP 204 million, okay, with a DTA of 25%, which nets out to be GBP 153 million after tax. So there's that still portion even if -- goodwill is not the only thing that you are testing for IAS 36.

Marco, this next question is for you. And this is, can you explain the outlook of the gross margin trajectory of Quorn? Why did it dip sequentially in Q3, even though energy prices were lower, considering that Quorn U.K. was only down 1%?

Yes. So I think the overall trajectory is mainly linked to the fact that high input cost were at the top towards the end of last year and towards the quarter 1 of this year. So, we have been implementing price increases but not fully compensating the input cost increase. The fact that then we need -- we have a considerable element of our volume that is in stock. Therefore the stock that we have contained the higher input cost. And so we still need about around 6 months of stock to flash out the higher input costs. On top of that, that's the dimension of the raw packaging material and a particular utility that for us is quite significant. On top of that, the specific impact in the quarter is also related to the decline of the volume. So we are taking continuous measures to resize our business, taking in consideration that there's a lower volume that is going through our factories. But that is -- we have an element of fixed cost and the lower volume didn't allow us to fully recover the fixed cost. We are continuing with a number of measures to streamline and to adjust our organization to the volume, while we also want to invest to restart the category and be ready when the cap grows up again for growth.

Jesse, next question is for you, and this is, how will the cash top-up, if any, be used?

Yes. So thank you for that question. Yes, maybe I did not explain this that clearly. The cash top-up will only happen by the end of the term. And as I mentioned earlier, in the mechanics by June 30, 2033, when we have the final impairment number, if there is any as of December 31, 2032, okay? The cash top-up will be an offset to the cumulative impairment that has happened from January 1, 2032 to December 31, 2032. So it is a offset to a noncash charge that will accumulate during this tenure. We cannot immediately use that cash because the cash will only be available at the end of the term, in fact 6 months after the tenure of the financial support.

Jesse, this question is regarding APAC. And can you comment on the customer service level…

Can I follow up the question so that Jesse can explain better? So if, for example, next year there is an impairment again for GBP 100 million in U.K., for example, what will happen to this top-up, what will happen to the retained earnings that will flow through to the MNC, like what happened last year. So impairment next year -- you said that the final settlement will be 10 years from now, right?

Yes.

But if one more impairment happened next year, what will happen to our retained earnings?

Yes. So what will practically happen is that, as I mentioned earlier, there will be a day 1 entry. The day 1 entry, which is the time value of the option provides an asset at Monde Nissin Singapore that will provide already a significant cushion. However, that entry is not P&L as it's a direct credit to equity. Then there will be a mark-to-market of the derivative -- of the put option. And the true-up will be done on the mark-to-market based on the actual impairment because the option will only be in the money when there is an impairment. It will be out of the money when there is no impairment. So there will be a calculation of what is the mark-to-market value of that option. And it will be compared with the original OCI entry and the delta will be booked as a P&L.

So top-up is not P&L, but impairment also not P&L, right? The 2 will offset each other. It is based on equity. So you don't have to do the restructuring again, like what we did just now.

Just to be clear, the impairment will be a P&L charge. Bulk of the offset will be non-P&L, but it will provide retained earnings protection at the listco level because the asset that you have created with the day 1 entry in Monde Nissin Singapore.

Yes, I think that should be made clear, right? So you're protecting your retained earnings at the balance sheet.

At the listco level, yes.

Jesse, another question for you is, can you tell us how much is the cumulative investment in MN U.K. as of January 2023, which serves as a floor price for any related party sale? And then what is the current carrying value as of the end of September for the Meat Alternative segment?

So we have, as of January 1, 2023, GBP 291.2 million invested by MN SPL. This is a net investment, net already of the previous impairment that happened in 2022. It's GBP 291.2 million, okay? And this year we have added GBP 56 million to that -- GBP 56 million. So it's about GBP 348 million. And as you recall, the bulk of the GBP 56 million, GBP 51 million of which was used to pay down debt, GBP 5 million was used to support the restructuring. The GBP 51 million, therefore, is neutral as it will create a higher net asset due to -- well, due to the lower debt -- external debt.

Jesse, next question is for you on APAC. And can you just comment on Q3's customer service levels?

Yes. So, first of all, we practice a differentiation policy on CSL. We differentiate between our core SKUs, our most popular, most loved SKUs and brands versus the noncore SKUs. It's still important, but -- okay, less in demand. And for our core SKUs, we have been consistently since Q2 having CSL levels of over 90%, for noncore SKUs over 85%.

Okay. Thank you, Jesse. This actually was the final question. So I will now hand the call back over to Henry for closing remarks.

Thank you, Mike, and thank you, everyone, for your participation in this call and continued interest in the company. In summary, Q3 brought strong top line growth and significant gross margin expansion in our APAC BFB, with our Noodles category leading the way. While it is still early in the quarter, we have seen good mid to high single-digit growth in October for our APAC BFB, and we expect further gross margin expansion for the fourth quarter. And despite the continued challenges in the Meat Alternative category, our successfully implemented business restructuring has enabled us to maintain EBITDA breakeven for the second consecutive quarter while achieving additional growth in market share. With that, I look forward to speaking again next year when we hold our full year earnings call. And until then, stay safe and healthy. I wish you a happy holiday season. Thank you.