Thai Beverage Public Company Limited (Y92) Earnings Call Transcript & Summary

Good evening, everyone, and thank you for joining the Thai Beverage First Half 2023 Results Call. [Operator Instructions] I will now hand over the call to the presenters, Ms. Namfon Aungsutornrungsi, ThaiBev's Head of Investor Relations; and the members of ThaiBev's senior management team. Please go ahead. Thank you.

Thank you, and good evening, ladies and gentlemen. Welcome to ThaiBev, the First Half 2023 ended the 31st of March 2023 financial results conference call. I am Namfon Aungsutornrungsi, Head of Investor Relations. For the conference call tonight, I will start with the summary of the first half results, then we will open the line for a Q&A session with our management team. The summary of the first half financial results, total sales revenue of the company for the 6 months ended the 31st of March 2023 was THB 148,295 million, an increase of 3.7% when compared to the same period last year. This was due to an increase in sales revenue of the beer business, nonalcoholic beverages business, food business, although there was a slight decrease in sales revenue of the spirits business. Net profit was THB 17,781 million, a decrease of 3.2% compared to the same period last year. This was due to a decrease in net profit of the beer business, nonalcoholic beverage business and food business, partly offset by an increase in net profit of associated companies and the spirits business. ThaiBev's Board of Directors agreed to propose an interim dividend payment of THB 3,769 million or THB 0.15 per share, the same as last year. For the highlights of the first half operations, the spirit business recorded sales revenue of THB 65,161 million in the first half 2023, a slight decrease of 0.04% year-on-year. This was due to an 8.5% decline in total sales following from a high base in the first half of last year. That was a result of sales agents accumulating inventory ahead of price increase during the period. Despite price adjustments and changes in the product portfolio mix, driven by increased consumption of brown spirits in Thailand, the spirit business continued to face cost pressure, particularly in relation to packaging costs. Nevertheless, the business reported a net profit of THB 12,839 million, showing a 0.18% increase compared to the first half of 2022. The beer business saw a 4% increase in sales revenue of THB 64,434 million in the first half 2023. Despite a 2.2% decrease in total sales volume year-on-year, the growth in sales revenue was due to price increases implemented. However, an increase in brand investment and marketing activities during the festive season, coupled with an increase in key raw materials and packaging costs, resulted in a net profit decline of 29.5% to THB 2,532 million. The group NAV business recorded 15.1% rise in sales revenue to THB 9,439 million in the first half 2023. Lifted by a 7.7% increase in overall sales volume, this was mainly driven by higher demand for drinking water, ready-to-drink tea, and carbonated soft drink products, as consumption improved post-pandemic and economic activities returned to normal. However, net profit declined by 35.2% year-on-year to THB 284 million, taking into account increased brand investment and marketing activities, higher distribution costs and material costs. The decline was partially offset by production efficiency resulting from increased utilization due to the volume growth. The food business recorded a 21.8% year-on-year increase in sales revenue to reach THB 9,365 million in the first half of 2023, in line with the rise dine-in traffic at the restaurants. However, the Group's ongoing efforts to improve brand visibility and accessibility, along with pre-operating costs incurred in conjunction with the opening of the new stores, cost push factors, as well as increased operational and administrative costs to support the sales growth of the food operation, these have led to 51.2% decrease in net profit to THB 82 million. The international business recorded a year-on-year increase of 6.5% in sales revenue to THB 39,262 million in the first half. The increase was attributed to 19.8% surge in international spirits sales, driven by strong sales performance in Myanmar, increased bulk sales in India, the U.K. and Japan, and higher case sales in ASEAN and some North Asian countries. The international business also recorded 3.9% growth in the beer sales, mainly driven by sales revenue in Vietnam and higher Chang soda sales in China. That is the summary of our first half 2023 financial results. Now we will open the line to any questions. Dana, please open the line for Q&A.

[Operator Instructions] Our first question is from Divya Gangahar, Morgan Stanley.

First question was on the beer business. Could you help us understand how the beer business has done in Thailand, in particular? When we see the overall numbers, it seems that revenues have declined 3%. But if you could comment on the domestic business because the industry growth shows a negative number of 10%. I just want to know how ThaiBev has done in Thailand. And if the volumes have indeed declined, what's the reason for the decline, given that the on-premise would have come back in a bigger way this year compared to last year? My second question is on the spirits business. Could you quantify the price hikes that have been taken for brown spirits overall and when were these taken? And also what is causing the spirit volumes to be lower versus pre-COVID levels? Is it in Thailand or is it in Myanmar? And if you could explain the reason for that gap. And my last question is just on the outlook for the domestic beer and spirit margins for the second half with respect to your raw material coverage, and if you expect marketing spends to increase further from the current levels?

We respond 1 and 3 together.

This is Lester here. As Khun Ueychai has just suggested, I will be addressing question 1 and partly 3 as well, talking about the domestic Thai beer market as well as the -- where we see spending going in for the rest of the year. So looking at the total Thai bear market, really on a month-to-month basis, it's almost like a roller coaster. It goes up, it goes down. We're not seeing the nice recovery -- smooth recovery at the end of COVID. But I have to say that it is mainly in the green territory. So half year versus half year last year, we were about even with last year. What the nice part for us at the domestic level is the share number. As of December last year against the -- our #1 competitor, we broke the share gap, came to a single digit. And in the end of the second quarter, that share gap is now halved. So we're catching up in terms of share between the #1 and the #2 brands in the market. So when you ask me about how I see the outlook for the Thai beer market, especially for ThaiBev, I remain very positive in terms of where we're going to end up in terms of share. In terms of costs, you talked about cost a little bit as well. You can see from the numbers that the COGS has increased quite dramatically year-on-year, total of -- just all the categories, raw materials, packaging materials, utilities, everything has gone up by a total of 19%. So that is quite significant. So we took a couple of price increases earlier this year. Enough to cover. But although in terms of pricing, we are at about the limit, so that if there's any further raw material price increases, I'm not so confident that we are able to increase prices again for the rest of this year. So we're looking to try to see how we can save in other areas. And therefore, we come to A&P. When you look at A&P, yes, year-on-year comparison versus last year, it has gone up quite significantly. Because, again, last year was the tail end, the COVID year. This year, we are in an open market again. So A&P activities have come back in full force. But what I'd like to say is that when we do a comparison versus 2019, which is the last -- which is the pre-COVID year, on a similar comparison, our baht per liter spend for A&P has actually come down by 19%. So we are being more efficient in the way we spend our money to get the volumes that we have. But your question looks forward as to how do I see the second half of the year. Obviously, we do have measures in place. We do have a ring fence in case we need to defend the bottom line. We do a ring-fencing program in place that we can return money to the company to protect the bottom line. So looking forward, moving forward, overall, total very confident that in terms of share, we will continue to gain share. And I'm also very hopeful that the market will continue to grow so that our share numbers pick up from there. And then when it comes to cost and the bottom line, again, confident that we should be able to deliver by the end of the year.

This is Bob. I'll answer the second question, third question as well. You're asking the second question on price increase. in Thailand, how that's going. So let's just recap this. In the first half of last year, because we compare 6 months against last year. In the first half of '22, we had a price increase in white spirits. Quite a good price increase, so the Thai level of white spirits sale in that first half, resulting in lots of trade loadings. Okay. So then I jump to explain to the declining in volumes. If we look at white spirits in Thailand, the first half of this year, the volume against the first half of last year, experiencing decline because of that high base has a lot of inventory loadings in the system. So I think we -- actually, if we normalize it, we'll probably have a very small single-digit decline on white spirit in Thailand. I think that being said, the volume in Thailand and around -- in other, I'd say, in other markets, have experiencing all double-digit growth. Our brown spirit experienced more than double-digit growth for the same period. Grand Royal whiskey also experiencing double-digit growth. Our international spirit out of the U.K. that engaged in brand sale together with bulk sale, volume-wise experiencing double-digit growth as well. So in that combination, it resowing to a slight decline of total volume that reported, as you can see. Okay. Having said that, it's a fantastic result. This is the first half EBITDA that we're reporting is probably the highest since listed, including GP and EBIT as well. So to answer to the last -- other questions on price increase, what we have done for brown spirit this first half, we have finished that. We've only done probably half of what we plan to do this year, meaning the number of SKU that need to be reflected in price increase. So in the second half, we probably have a bit more price increase to be done in the remaining SKU. So I will leave it at that. Yes. So in price increase, sometime you have volume fluctuations, but we believe the baseline increased in brown spirit consumption, and that's also reported by third-party market research. We're still looking at a double-digit increase in consumptions for the first half of this year as well. So I think that's all-good news. Cost wise, the first half of this year, the cost pretty much been reflected what's supposed to be our cost of good throughout the year. So I don't think in the second half, we'll see surprises in our cost of goods. So that's what we're seeing. Okay. I hope that's answer.

Yes. If I could just have a very quick clarification, and maybe from Lester, on the market share gain. Could you just maybe talk about that a little more in terms of what do you think are the drivers of that gain? Is it distribution led? Is it marketing led? Any new products out there? And after the price hikes that you've taken, what's the gap now between Leo and Chang? Basically, that Leo also follow or whoever took the price hike first?

Yes. Divya, so when it comes to the gain in share really is not about new products. We haven't launched any new products, but mainly, it is -- we do have a program in ThaiBev where we go out into the market as a complete team, all the product groups together. And I think the efficiency that we're gaining in the market as well as the collaboration that we see across the product groups, gives us a lot more distribution strength in the market. We are penetrating a lot more outlets in -- across Thailand. So that is adding to the growth in our share. So when you ask about the numbers between Leo and ourselves, like I said, in December, for the first time in many, many years, the gap was a single digit. And by the end of the second quarter, that number has halved. So we've gained quite a lot because of this program. But actually has been led by Khun Kosit, so it's non-al spirits and beer together. And we approach the market as one total ThaiBev group.

Got it. And then the price gap between Leo and Chang right now?

The price gap, because all of us have taken price increases in various different times across different SKUs as well. So the gap, after all the price increases, will come back to the same cap as we had before the price increases. So it's at the retail level, it's a couple baht for the big bottle at retail pricing level.

Our next question is from Selviana Aripin, HSBC Limited.

My question is, first, with regards to goodwill. I see that there is a decline in the number in the quarter ending March as opposed to September. Can you clarify where this is from? Is this from spirits or from the beer side? Can you clarify what's going on over there? The second part is with regards to specifically inventory and, in particular, raw materials. I noticed at raw materials has actually gone up. Presumably, this is from beer. Can you clarify what's going on there? Is that loading? Or is that something else? Can you clarify from a pricing versus volume as well? So those are my 2 questions for now.

This is Kosit speaking. For the goodwill that you see in the -- at the end of the period that we -- year-on-year is at the end of the period is lower. Mostly, it came from the foreign exchange translation on the financial statement because of most of the -- when we dominate by the baht, right, baht strengthen, so when we translate for international operation, there could be also part of that one. It will be lower when we recognize as baht in the balance sheet. That is reason that year-on-year lower in terms of goodwill. It's nothing about any significant change in terms of the transaction, yes.

And this is with regards to both Vietnam and Myanmar?

Correct. Is this include Vietnam and also some part of the -- in the past is when we have the investment associated with the FPL and F&N as well. That majority will be the Vietnam.

Okay. Got it. And can you explain from a -- I guess, from an accounting perspective what happens when baht actually weakens, let's say, 6 months down the road or 1-year down the road, will you reverse back the goodwill?

If you see in the past year, right, when you see in the equity part, right, you see the section called the other comprehensive income, right, when the baht is -- you see last year, baht is quite depreciated, right. The part of equity and also the goodwill is up both the asset side and equity, you will see that this is kind of the things and that we will do consolidation from international, we will be up and down based on the translation of international operation Khun Selviana, yes. You can check the last -- yes, yes.

So we are now...

With regards to my second question...

Repeat your second question, Selviana.

Sure. So the second question is with regards to, I guess, the increase in working capital, particularly from inventory. I'm assuming that this sort of comes from beer, particularly with regards to raw materials, there is actually a marked increase there. Can you speak about what is going on there? Are you loading up? Or is that because of pricing? Can you explain what's going on over there?

Selviana, this is I again. When you see the working capital year-on-year, right, last year, actually, we kind of -- some of the reviews on the inventory based on the delay the stock in sale. But this year, sales is going up. We have some of the bill, the stock is going up and also the receivable also going up as well according to the growth of the sales. So that's why you see year-on-year working capital is quite -- get some of the cash that we need to build up working without in this area.

Okay. And specifically on raw materials?

I think both all material and finished goods as well, it's not only the raw material sales, Khun Selviana.

Sure. And sorry, can you explain? Is that because you're loading higher volume in anticipation of future volumes? Or is that because of a function of pricing?

I don't think it's about the -- because of the loading the volume concern. Last year, actually, the cover the inventory is already down, right, because we have the depleted of stock. This year is still coming back, we ramped the business, sales going up. So it's a normal operation that we need to build stock to support the sales growth during the -- especially on the summer side.

Our next question is from Llelleythan Tan, UOB Kay Hian.

So I just have one question. So it's about Sabeco in Vietnam. But I'm just trying to understand what caused the fall in year-on-year revenue for Vietnam. So I understand that, of course, the beer segment may also suffer from their fund loading, but I'm just trying to understand what really drove the fall in revenue. So is it like inflationary -- high domestic inflationary pressures? Or high inflation that caused consumption volumes to fall?

Okay. I mean, in general, I think that if you know the GDP numbers for Vietnam has come down. I mean, from the third quarter last year at 13.7% to about 5.9% in the last quarter of 2022, and the first quarter was actually dropped down to 3.3%. And in the south, in particular in Ho Chi Mihn City, dropped down 0.2%. So GDP growth is one. The import-exports of Vietnam has come down also, resulting in a lot of job losses in the industrial part. So the general sentiment, consumer sentiment is no good. So I think if you -- also you have read, our competitors result as well, I mean, the drop was even more drastic than ours, I think. But generally, I think consumer sentiment because of the economy. But I think we are pretty positive. I mean in Vietnam, in about 2 weeks' time, about 1-week-plus time, the Chinese tourists are coming in. And I hope that the interest rate has stabilized, will stabilize in the coming months. Plus I think with the raw materials stabilizing, I think we are very confident I think in the next few months going forward, we'll see growth there.

Okay. I just have one follow-up. Is it possible to share the first quarter and second quarter volume for just for Sabeco?

Sorry, Llelleythan. Normally, we disclose the volume for ThaiBev is under the beer group together. So we're now separate. Sorry about that.

Okay. I can I'll jump back to the queue.

Our next question is from Khun Thitithep Nophaket for Kiatnakin Phatra Financial Group.

Can you hear me?

Go ahead, Thitithep. Yes.

I have just one quick. If you look at the consolidated debt level, your SG&A as a percentage of sales used to be about 16%, and then you cut it to around 14% during the COVID because of -- there was no marketing activity. And right now, you're SG&A sort of come back to about 16%, 17% again. I'm wondering that whether I should assume that the ratio will stay here, or it would go up further. Because my understanding is that Sabeco is spending money to build brand given the competition in Vietnam. That's the only question I have.

Bennett. You want to answer that, Bennett?

Yes, I lost the question. Sorry I couldn't hear...

It's about the A&P.

Yes. Okay. ASP, we continue to spend. Already we are -- I think we are -- as we have mentioned many times, we are trying to focus on efficient spend. So on a per liter basis, we keep -- trying to keep it constant or lower than last year. But with the volume coming down, we also have ring-fenced our spend. So I think we're confident that still keep it manageable. I think we'll be protecting our bottom line to ring-fencing some of the advertising spend. So I think, in general, when the economy is down, we do not cut drastically, but we will try and keep it to -- for lever spend that's not higher than the previous year. I think that's the way we manage it.

This is Prapakon. I think your question is on consolidations and the percentage of SG&A, so whether it be our brewers back to trend. I think the answer is what you see in the first 6 months, probably start to be what we will maintain. I mean we have -- it is true that we have started to spend, but then the spending on a percentage of sale will probably be at this level. So we don't actually expecting a higher percentage going out, but now that it's going to come down, yes.

Our next question is from Permada Darmono, UBS.

I have a couple of questions. So the higher mix of brown spirits, could you just let us know in terms of first -- as of first half, the sales and volume mix between white and brown spirits domestically in Thailand, and approximate kind of revenue mix? And related to that, I'll just ask it one by one. I saw that government data suggests that molasses production is actually below the government forecast. So what's the outlook for molasses prices? Because I recall that in the last quarterly briefing -- sorry, half yearly briefing, you're anticipating for molasses prices to actually increase and therefore, price outlook for molasses would be quite benign. Any comments on that? So spirits mix and molasses.

Okay. Well, this is Prapakon. I'll answer the molasses questions. On the spirits mix, we don't disclose the mix of our white and brown. As we answered in an earlier question, that we're experiencing double-digit growth in our brown, but then our white spirits, if we not a normalized basis, probably have declined in this very small single digit for the quarter -- for the 6-month period. On the molasses, the output of -- the sugar plantations that were just done in this crop that just ended just right at the beginning of April this year have a better harvest than about the same -- better or about the same as last year. So the molasses, it is true that it's below what the government was forecast, but the number -- there are volume of molasses that came out for this harvest is at or about the same as the last year. Our input cost for molasses for this crop is higher than a year before, that's true. So that's the answer, what we have been experiencing in terms of input costs that came in.

What about on barley? Because barley is a derivative of wheat prices, right? And the wheat prices is down significantly from the peak. Should we anticipate lower raw material prices in terms of barley for beer?

Dr. Pisanu, can you respond to Permada. Dr. Pisanu, can you answer to the question?

Yes, please, I didn't hear the question properly. About the price of...

The barley situation, just tell Permada on barley.

Yes, yes. The barley and the malted barley, the price has been weakening down quite dramatically from last year. Firstly, about probably because of the freight costs. And secondly, the situation of the geopolitic is quite less now. So you can be rest assured that the price of the malted barley will be less than the previous years. Thank you. Any more questions? I'm happy to answer you.

Yes. The next question is on -- I sadly read about Bennett's planned resignation from Sabeco, and I understand that's part of normal depot reshuffle within the ThaiBev Group and Lester will take over. Can you just sort of clarify management changes plan. So on the domestic beer side in Thailand, who's going to take over with Lester head up both Sabeco and Chang? And also just in terms of those market share gain that you mentioned, the distance in market share halving at the end of the second quarter, is that just Leo or it's aggregate Leo plus Chang? So some color on that would be useful.

Yes. Permada, we will make an announcement on Lester's replacement. So just hold on. I think it will be out shortly. Okay. And on the other question, Lester, please.

Permada about clarification on the share gains. We measure Leo against Chang total brand. So for them, it's all the variants, Leo, Leo 8. For us, it's also all the variance Chang and Chang Cold Brew together.

Got it. I appreciate that. And lastly, just in terms of your strategic plan with -- based on your disclosure, the intent to privatize Oishi is really to separate their food and beverage business side. From a strategic standpoint, can you give us some color on the intent in the future of why separating it, would be a good idea? How should analysts or investors think about the steps going forward?

This is Nongnuch. Okay. I'm taking care of the food business and also Oishi. Yes, actually, there's not much trading volume of the share of the company. So this will provide the opportunity for our shareholders of the company to sell the company shares. And I think the second one, ThaiBev is actually clearly is in the process of producting the feasibility study into the restructuring plan of the operations of food and the nonalcoholics. So we believe that this will enhance the management effectiveness and also enhance the business potential, okay? And last but not least, I believe that this is coming -- the delist of the company will provide a cost saving, which would have been incurred in the connection with the company being publicly listed entity.

Khun Nongnuch. Is there a change in strategy on the food side? I mean, for example, KFC in Thailand is run by 3 different companies, right? Is ThaiBev looking to potentially consolidate the market? CVC as well is publicly disclosing that they're looking to sell their stake in QSR in Singapore and Malaysia. Is there an ambition to actually grow the food business much larger through this privatization program and so forth?

Permada, at this moment, we can't disclose too much because we are now in the process of working on this plan. We will disclose when we are ready. Sorry, Permada.

Our next question is from Andy Sim, DBS Vickers Securities.

Hello?

Go ahead, Andy.

The first question is actually more of a follow-up from the raw material price. I think Dr. Pisanu mentioned earlier that raw material prices weakening. Can I just check when would we -- how long forward you have been purchased forward in terms of barley, malted barley, as well as like things like aluminum? And when -- because these are all coming down. And when will we see the positive effects flowing through? That's the first follow-up question. The second one would be in terms of the election. I think about 6 months ago in the last call, Khun Ueychai, you mentioned that you're hopeful that with the election, in the roundup, there would be positive effects in terms of consumption and spending. Just wanted to get your sense on the company's sense on how is this flowing through? And what you're seeing on the ground with respect to this area, maybe more of some commentary on that?

Can I take the first question, please?

Go ahead, Dr.