Monde Nissin Corporation (MONDE) Earnings Call Transcript & Summary

Good afternoon, and welcome to Monde Nissin's First Half 2024 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; Marco Bertacca, Chief Executive Officer of Quorn Foods; and Nick Cooper, Chief Financial Officer of Quorn Foods. By now, everyone should have access to the earnings press release and presentation. These are posted earlier today in the PSE Edge website. This information can also be found in the Investors section on Monde Nissin's website. And finally, before we begin, please note that the financial information being presented is unaudited. And during the course of this 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. Now I'd like to turn the call over to Henry for introductory remarks. Henry?

Thank you, Mike, and good afternoon, everyone. I'm happy to report that the second quarter saw modest growth and on a year-on-year basis, continued expansion of gross margin due to the lower cost of commodity. Overall, core profitability driven by our APAC BFB business remained very strong despite continued challenging business -- continued challenging business conditions for our Meat Alternative business. During the quarter, we saw an improvement in its gross margin as we are beginning to see the benefit of lower input costs. While we are holding for further improvement in our gross margin over the coming quarters, we remain -- we maintain our commitment and focus on controlling costs with the goal of achieving EBITDA breakeven or better for this year. I would now like to turn the call over to Jesse to provide more details for our consolidated performance and APAC BFB business. Jesse, please.

Thank you, Henry. So I'm pleased to report our unaudited first half and second quarter financial results. This is highlighted by improving top-line progression, continuous gross margin improvement or expansion that flows to a strong core profit improvement of 37% for the quarter -- for the second quarter and 46% for the first half. Now zeroing in on net sales, net sales improved in Q2 from 2.1% in Q1 to 4.2%, bringing the first half to 3.1%. This is led by APAC Branded Food and Beverage, in particular, noodles and others category, which consists of culinary and beverage. Gross margin expanded 370% versus a year ago on the quarter and 460 basis points for the first half. The improvement in gross margin flow through the core net income leading to a 37% increase in core net income and a 46% improvement in the first half. The other good news is that for both segments, APAC Branded Food & Beverage and Meat Alternative improved gross margins, as Henry mentioned, versus year ago. Meat Alternative also improved gross margins sequentially. Next slide, please. The core profit improvement, it translated to cash versus same period versus a year ago. We improved cash by 78.2% to PHP 6 billion in the first half. Next slide, please. Zeroing in on APAC Branded Food & Beverage, the sales growth was led by noodles and others category. The expansion for gross margin was 410 basis points for the quarter and 580 basis points for the first half. This translated to 34% growth in core net income for the quarter and 38% growth in core net income in the first half. Next slide, please. Now zeroing on the category by category sales progression, our sales cost was led an absolute by noodles, which grew 8.3%, led by a very robust 10% growth in volume. Biscuits had a difficult quarter as we had supply chain hiccups for our biggest brand, SkyFlakes. That thing is now a thing in the past as we will guide later on -- as we will discuss later on during the guidance section. Beverage and culinary continued to grow double digits and we foresee this to continue. The first half results reflect the results of the Q2, improving performance of Q2 relative to Q1. Next slide, please. From a share standpoint, noodles sales growth was underpinned by share growth. Our share growth is led by Kasalo pack which is now 65% of the market leader on this sizing and pricing segment on a total Philippines basis. Moreover, in the supermarket channel, we are almost tied at 98% of the market leader in the sizing and pricing segment. For biscuits, I mentioned the supply chain hiccup that has caused some slight share dilution from 28.5% to 28.4%. We have now recovered fully from the supply chain hiccup. In fact, we are promoting our advertising our SkyFlakes brand with a new campaign of [Foreign Language], which translates for those who you rely on, they rely on SkyFlakes. This campaign will involve the emotional nostalgia that our core users have for this iconic brand and hopefully generate a new excitement. We would also like to highlight the M.Y. San Grahams brand. This is a more than 50-year old brand, modern trade focused brand that is PHP 2 billion in size of annual sales, but is growing at a 37% clip this year. The secret sauce for this is improving or increasing the use educations. We have taught moms to prepare simple desserts using Grahams as an ingredient and we have taught momtrepreneurs to use this as an ingredient for them to augment their family income by selling desserts to their friends and family. Now to others where we'll talk about our progress in culinary and beverage. For oyster sauce, our shares improved nearly 300 basis points versus a year ago. This is a marked improvement as we had supply issues last year. We have now fully recovered. In fact, oyster sauce continues to be one of the highest -- the best stories in as far as increasing household penetration. We have now reached 56% household penetration for oyster sauce, realizing our ambition of replacing soy sauce with oyster sauce among Filipino households. By the way, our relationship with Mama Sita has gone from strength to strength. This is the 10-year anniversary of our collaboration and we have grown the business with them 3.3x during this time. For yogurt drink, building on our already strong 89.2% share last year, we have further improved it to 91.1% on the yogurt drinking segment with our DutchMill brand. Next slide, please. On bottom line and gross margin, we continue to have favorable lock-ins which is 17% of our APAC Branded Food & Beverage COGS, continues to have good trends. In fact, these days, wheat is trending near 1 year lows, especially for hard wheat. Palm oil is also having a good trend. And while we have not fully locked in on Q4, we -- the recent days have shown low prices which gives us an opportunity to fully lock in for the year. This supports our 406 basis points improvement in gross margin that we talked about earlier. In addition to this, sugar and eggs have been favorable to our COGS progression as well. Next slide, please. I will now turn it over to Nick, who will discuss about Meat Alternative.

Great. Thank you, Jesse. Next slide, please. So as Henry mentioned at the start, for Q2, the category environment for Meat Alternatives remained challenging and we saw continued pressure on our top-line with underlying sales in the quarter down about 9%. I am, however, pleased to say that Q2 did show progress on the gross margin with an increase both quarter-on-quarter and year-on-year and our focus on cash has allowed us to remain cash neutral in the first half of the year. So looking at the details, on a comparable basis, which adjusts for the accounting change we spoke about in Q4, sales were down 2.7% in the quarter, driven by a 6.4% decline in sales at constant exchange rates, offset by an appreciation of the pound against the peso. If you adjust for customer destocking that occurred in Q2 2023, the underlying sales were down about 9% at constant exchange rates, which is broadly in line with the 9% underlying performance that we reported on the same basis in Q1. This top-line trajectory is worse than we'd anticipated at the start of the year and is largely driven by the fact that the U.K. retail market continued to decline double digits in the quarter. In this environment, we're very much focused on protecting cash and profitability, while at the same time funding targeted investments to drive a return to top-line growth. Moving on to gross profit. You can see the gross margin expanded in the quarter with a core gross margin of 23.1%, which was 146 basis points up year-on-year on a comparable basis and 313 basis points up quarter-on-quarter and that is largely driven by lower raw materials and utilities costs beginning to impact those margins. Then moving on to core EBITDA, we posted a loss of PHP 84 million in the quarter. This was slightly up on the loss of PHP 60 million in Q1, driven by targeted investments in marketing, partially offset by stronger gross profit and cost control. We continue to target core EBITDA for the year, which is breakeven or better. Finally, during Q2, we continued our focus on cash and have remained cash neutral through the first half of the year. This includes a reduction of inventory quantities by more than 20% in the first half of the year and more than 35% over the last 4 quarters. This has been achieved without impacting service levels to customers. Next slide, please. So looking briefly at the market environment and the performance of our foodservice business. As I mentioned, the U.K. retail market continued to decline in the quarter and was down about 10.2% compared to the same period a year earlier. In that environment, we saw a small erosion in our U.K. retail market share with continuing strong frozen gains offset by some losses in chilled. Finally, our foodservice business continued to grow and posted an increase of 8% in sales per day and it now accounts for approximately 20% of our sales in the quarter. Highlights include robust growth of our core U.K. foodservice business and further expansion of our KFC business. With that, I'll hand back to Jesse for the consolidated full year 2024 guidance.

Thank you, Nick. So I'll continue by talking about, for full transparency, our reported net income, so for our core net income, which grew at 37% for the quarter and 46% for the first half. There are significant non-core charges related to a revaluation of the guarantee asset. Recall that the family guarantee for the Meat Alternative was underpinned by 2.156 billion shares and those shares are denominated in peso. So the stock price and the exchange rate would have effect on that. So the 1.6 billion is largely driven by a revaluation based on stock price and the deteriorating peso relative to the sterling. However, just for truth, transparency as well, our sterling investments would now also will be revalued because of the depreciating sterling, but this is shown under comprehensive income. So we thought that it will be proper to show the 2 as they offset each other and are really part of one transaction. Moving on to our guidance. Next slide, please. For APAC Branded Food & Beverage, we are guiding towards mid-single digit growth for both our noodles and biscuit business going forward. And for culinary, we are guiding towards double digit -- continuous double-digit growth. We are off to a great start in July where we grew 10% for our Philippines business. This was led by our flagship biscuit brand, SkyFlakes, which grew 19% versus a year ago. I mentioned earlier that we had supply chain hiccups. We have now fully recovered and the growth in July shows that the supply issues are a thing of the past. The Meat Alternative segment will continue to have top-line challenges. But from a gross margin standpoint, we forecast gross margin improvement year-on-year due to the lock-in cost -- commodity costs for APAC Branded Food & Beverage and now also for Meat Alternative. Now the more exciting news on beverage, we mentioned earlier that we have growing share in our DutchMill drinking yogurt category, which now has 91%. Now we have improved another beverage introduction in our portfolio. Next slide, please. Introducing Monde Nuvi, an exciting new product that we have -- that we are launching -- that we have launched. This is the first chocolate milk drink with nata de coco sinkers. This product is a co-branded product Monde Nuvi, with Nutrifood, a large -- one of the largest dairy manufacturers in Vietnam. The chocolate milk market is valued at PHP 9 billion. This is double the size of our drinking yogurt category. We hope to be making inroads in this much bigger part of beverage of the various category in the near future. With that, we end our prepared remarks and are ready for Q&A.

Thank you, Jesse. I will now moderate the question-and-answer portion of the call. Questions can be submitted via that your chat box. We will attempt to address as many as possible time permitting. Jesse, the first question is for you and this is where do you expect EBITDA margins of APAC BFB to settle? It started strong, but it's hard to come off or maybe normalized in the second quarter.

We did guide for higher A&P or OpEx previously. So our A&P, for instance, went from 2.1% to 4.5% in the second quarter. So that is part of the phasing of our investments. We said that we will rely on volume growth for our sales growth, and that would require A&P investments. Moreover, I think the gross margins, while we are improving year-on-year sequentially, the USD-Philippine exchange rate has deteriorated from PHP 56 to PHP 57 or PHP 58. It's now improving and hope the trend continues. But we took in that -- we have that hit. We also have one-offs, such as a collective bargaining agreement bonuses that are one-offs that happened in the quarter for Q2. We project that our going EBITDA margin will be closer to Q2 than Q1.

Great. Jesse, another question for you and this is why did APAC BFB gross margin declined 200 basis points quarter-over-quarter given no spike in key raw materials? And what is your read on Q3 and Q4?

So the reasons I already mentioned earlier, first of all, you have the exchange rate, 56. A lot of our raw materials are U.S. dollar denominated. So the exchange rate does play a role. Hopefully, again, in Q3 and Q4, the peso improves relative -- I think it peaked in Q2. Now, it's off peak. Hopefully, the trend continues. You also have a, as I said, one-offs, the collective bargain bonuses that affected us. We also have the supply chain hiccup for our SkyFlakes brand. So you had continuing costs that you're incurring, that we know production for almost 2 weeks. That affected our gross margin as the volume output was lower compared with the normal cost. Some of it -- we should be able to recover. Some of it, we will have to depend on factors that are beyond us, like the exchange rate.

Jesse, next action is for you and this is in the first quarter, soft -- okay. In the first quarter, soft instant noodle sales volumes were attributed to fewer selling days because of the timing of the Holy Week. It was also mentioned during Q1 results briefing that noodle volumes were 13% higher in April. If that's the case, it implies -- would it imply volumes were slower in May and June? Could you provide more granularity on the trends excluding the impact of the timing of Holy Week?

I don't have the exact breakdown month by month. But yes, it slowed down -- the growth in May and June slowed down because it didn't have the March to April effect of Holy Week. So it normalized in May and June. But as I shared earlier for the total quarter Q2, noodles grew 10% on volume.

Jesse, can you comment on what specific noodle products are driving the divergence in volume and price mix growth?

So I mentioned earlier that Kasalo Pack is leading our growth. This is the higher size and pricing segment. The price per gram for this Kasalo Pack is lower than our normal pack, but the price point is much higher. So when you sell more, we actually achieved more sales.

Jesse, another question for you. This is how is Nuvi price compared to key chocolate milk competitors like Chuckie and Choc-O?

Monde Nuvi is slightly premium. We view this as an affordable premium and we view that because it has an exciting factor of having added nata de coco, it can command that premium.

Jesse, another question for you. What led to the faster growth in consolidated core EBITDA in the second quarter compared to gross profit? And then also, can you just comment on the rationale behind the downward revision in the 2024 CapEx budget?

Sorry. The growth in EBITDA?

Yes. So what led to the faster growth in the consolidated core EBITDA in the second quarter compared to growth in gross profit?

So we have to get back to you on that. I don't have the answer straight to you on hand. So we'll get back on that question.

Okay. And then a follow-up is if you can just explain the rationale behind the downward revision in the 2024 CapEx budget.

It's just the timing of our plants. Some of the delays in the construction and in the delivery of the machines would affected the spending, the actual spending. We are still fully committed in the plants that we have said. For instance, we have started up the cakes line in Davao, and we are on track to start up our butter coconut biscuit line as well there in Davao. We have a new land that we contracted in North Philippines and are starting to develop plans to start the construction there. Some of it would be just delays in the planning and execution of the CapEx. So since the actual spending has been just 1.6, we did it right to bring down the CapEx forecast to PHP 5.9 billion.

Okay. Next question is for Nick. And this is how much did foodservice contribute to sales in the first half of 2024?

In the first half, it was approximately 19%.

Okay. Jesse, a question for you, and this is, what was the supply chain issue in biscuits? And how was this addressed?

It's an unscheduled breakdown in the machine. And that was then fixed after a couple of weeks.

Okay. And then another question and this one is related to Nuvi. Who are your main competitors in this group?

I think it was already mentioned that Chuck E earlier question, Nestle's Chuck E.

Okay. And Jesse, this is a question on impairment losses for Meat Alternative business. Do we expect more in 2024 or succeeding years?

I think it's premature to comment on that. On the one hand, we have good -- top line is challenging still. But on the other hand, the bottom line EBITDA is being controlled and the raw material prices are now being reflected in the gross margins. Also, the WACC should be improving as well as even the U.K., the BOE has brought -- has already adjusted the rates by 25 basis points. So hopefully, by December -- we need to wait for December because that's the basis for any IAS 36 calculation. But there are factors that are going against us, but there are factors that are going for us as well. It's too premature to comment right now.

Okay. Jesse, just going back to Nuvi, can you comment on its key selling propositions? How is it compared to competitors' products?

Yes. So competitor's product is your average chocolate flavor milk drink. This has nata de coco sinker. So it provides a new different experience to the users. So we hope that this different experience, this different field will create a lot of interest and excitement.

Okay. And Jesse, can you share any insights you have on consumer behavior so far in July and August? Are you still seeing persistent down trading, which promotions are working with customers?

Down trading in our category, we don't see that because we think we are one of the more economical food item. So people do go to our category whenever times are tougher. We also have a good portfolio of products that do well, whether it's good times or bad times, an example of which is our Grahams, right? It's growing 37%, as I mentioned earlier, of a big base of PHP 2 billion and it's because we found and articulated well new use educations for this brand. And people can economize by producing their own -- by making their own home desserts, homemade desserts using Grahams as a key ingredient, and they can make money by being momtrepreneurs by selling desserts. So there are different. It's all about how we market, are able to communicate the marketing point that we want to emphasize. In addition, I think more than this one, I think it is weather. I would like to comment on the weather. It was very hot in Q2. That depressed noodles volume in general. Of course, versus a year ago, it improved, but it's kind of low because it was a record summer heat. As many people have noticed, precipitation has come in these days and the strong results in July reflects that. We hope that, that trend will continue on in the upcoming months.

Jesse, can you please give the numbers for the one-offs that you saw which affected EBITDA in the second quarter? And how would EBITDA be without these one-offs?

Well, the one-offs -- [indiscernible] that's 0.3. We have increased investments in selling expenses. That's a phasing expenses. We had more displays, highlights, promotions in the trade, that's 1%. And then we have production inefficiency because of the shut -- because of the unplanned downtime. That's 50 basis points. So about half is kind of one-off. Half is deliberate higher selling and marketing efforts in order to boost the sales of our brands.

The next question is for Marco. And this is what indicators are you monitoring as probable signs for improved demand in Meat Alternatives? And then just as a follow-up, can you foresee sustained volume declines in the next few years?

So I think the key element that we are monitoring is really the U.K. retail environment because currently, we see some relative growth in Europe and in foodservice, as we have shared, while the U.K. retail environment is still under pressure. And I think one of the key element that we are monitoring is the consumer confidence. And as you have seen also in the latest news that the U.K. is going through some challenging times. So we expect that the new election would bring a bit of a new phase to the economy and bring the consumer back to the shelf and back to our category because we -- as I always confirm, the big trends are there, but consumer confidence and also actions from our side are also important. I always repeat, we are the market leader here and we need to continue to consolidate our -- or to strengthen our gross margin also in order to be able to invest in consumer attractiveness propositions. So we do not expect -- certainly, we expect for this year and possibly also for next year some pressure on volume and we are continuously looking at ways to optimize our footprint to adjust for that so that we can become stronger for the future.

Jesse, question for you is, can you remind us of the top-line contribution of noodles and biscuits to APAC BFB?

Noodles were 47%, biscuits is 32% and beverage is 11% and then culinary is 6%.

Okay. And just a follow-up on Monde Nuvi. Can you remind everyone when it was launched and if there's any part of sales that were in the second quarter?

It was launched in July.

Okay. And then also on Nuvi, can you give us more color on its production? Is that product imported from Vietnam? What is the revenue target in terms of contribution to APAC BFB and how is its margin compared to the existing portfolio?

We'll not give specific forecast, but our own guidance is we are playing in a much bigger category -- subcategory of beverage. It's PHP 9 billion big. So of course, we have ambition to get the sizable chunk of that PHP 9 billion market. Hopefully grow that market as well because of the excitement that it creates in the chocolate milk category.

Great. Thank you, Jesse. This concludes the Q&A. I would now like to turn it back over to Henry for closing remarks.

Thank you, and thank you, Mike. Thank you, everyone, for your participation in this call and your continued interest in the company. In summary, during the second quarter, we continue to have very strong core profitability. We do expect this higher gross margin on a year-over-year basis to persist and the strong core profitability to continue in the third quarter. The improvement in gross margin for Meat Alternative is encouraging. Before we see the turnaround of the category performance, our focus will be -- will remain very much on cost control and the team is striving to deliver EBITDA breakeven or better for this year. With that, I look forward to speaking to you next when we hold our third quarter earnings call. Until then, stay safe and healthy. Thank you.