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Executives

Magomet Malsagov – CEO

William Mitchell – Group CFO

Jordi Ferre – President, Commercial Division

Analysts

Sreedhar Mahamkali – Macquarie

Julian Lakin – Mirabaud Securities

Sophie Jourdier – Liberum Capital

Charles Pick – Numis

PureCircle Limited (OTCPK:PCRTF) F2Q 2014 Earnings Conference Call March 19, 2014 9:00 AM ET

Operator

Hello and welcome to PureCircle Limited 2014 Interim Results Investor Conference Call. Today I am pleased to present Magomet Malsagov, Chief Executive Officer; William Mitchell, Group Chief Financial Officer; and Jordi Ferre, President of PureCircle’s Commercial Division. For this call, all participants will be in a listen only mode and afterwards, there will be a question-and-answer session. [Operator Instructions].

I’ll now hand you over to Magomet Malsagov, William Mitchell and Jordi Ferre. Please go ahead.

Magomet Malsagov

Thank you. Welcome everyone joining us today. We appreciate your time and interest. I’m on slide five. Increases in sales and volume was driven by continued success of our new innovations. The growth was recorded in all food and beverage categories and regions globally. On CSD side, carbonated soft drink side, momentum is building. We are seeing wide range of launches and roll outs, notably Coca Cola Life and Pepsi Next. Global food and beverage usage of PureCircle Stevia 3.0 portfolio continues to accelerate. Important regulatory clearances have included US FDA GRAS no objection FFO, Reb M being developed in conjunction with the Coca Cola Company, and FEMA approval of two new additional flavors expanding our proprietary flavor base from two to four. As some of you know, PureCircle core is based on innovation and to-date Stevia 3.0 portfolio consists of 12 commercialized products. We have more innovation in a pipeline which will be introduced in due course.

In calendar year 2013, our application scientists held 70 PureCircle Universities with clients which played important role in accelerating adoption of Stevia 3.0 portfolio. PureCircle supports active clients with natural solutions so that the customer moderate their calorie needs. The Global Stevia Institute is established as a source of objective, information for consumers and is used actively by our clients. We have also established clear sustainability principles for the Stevia industry. Again, this leadership role is recognized by our customers in their own consumer communications. Activity behind these two key marketing initiatives continues to accelerate, and as for our sales and marketing roles we’ll dive a little bit deeper into that when we present later on. Now Group supply chain has delivered increased volume as well across an enlarged product portfolio, whilst reducing individual costs improving operating margins and supporting development of further innovation. Supply chain included production in anticipation for higher sales in second half of this fiscal year, and we also accelerated our midterm lease supply.

With that quick overview of operating highlights, I’ll hand over now to CFO, William Mitchell who will take you through financial overview.

William Mitchell

Thank you, Mago. Good afternoon or good morning to those of you calling in from the USA. I’m on slide seven. I’m William Mitchell, the Group CFO of PureCircle, and over the next few slides, I should talk you through our first half FY14 financial results. Starting with the profit and loss account, to remind you, from 1st of July 2013 IFRS JV has changed. We no longer proportionately consolidate our JV interest. Instead, they are equity accounted. As a result, first half FY13 sales are 1 million lower than reported last year. Looking at sales; sales at 34.9 million were 32% higher than first half FY13, with increases in all high purity sales products and across all regions. Sales of high purity ingredients grew 37%, driven by innovations in our proprietary Stevia 3.0 portfolio. Gross profit; the Group’s increased sales volumes translates to improved profitability, with gross profit increasing by 6.9 million, that is 128% to 12.3 million. Gross profit margin improved 15 percentage points to 35%, prior year it was 20%. Operating profit; operating profit improved by 5.8 million to positive 2.9 million. This reflects the first half FY14 gross profit improvement, offset by 1 million increased investments in the Group’s global sales, application and product innovation activity. Other expenses comprised discretionary items, principally the Group’s long-term incentive plan. Net loss and EBITDA both improved by more than 5 million, with the benefit to gross margin improvements flowing through the bottom line. And with that, I’m turning to slide eight.

Slide eight, cash flow. To remind you, our first half we have seasonal cash outflows due to leaf buy, inventory builds and lower sales volumes. Nonetheless, we drove [ph] a 6 million operating cash flow improvement versus prior year to a net 2 million outflow. This includes inventory production ahead of anticipated higher sales. Capital expenditure included 2.7 million of product and application development supporting our innovation pipeline. And in the first half FY14, we repaid a net 5 million of debt. I remind you that the prior year first half included a 20 million Sterling share issue. With that, I turn to slide nine.

Slide nine, the balance sheet. The Group’s balance sheet reflects fully invested production capacity and working capital able to support annual Stevia 3.0 volumes equivalent to at least 250 million of revenue. You’ll note that intangible assets increased, this reflects leaf and product development because we continue to invest in innovation. Inventories increased by net 2 million due to production ahead of higher H2 sales. And as I remarked earlier, net debt was a seasonal high see the cash flow briefing earlier. And with that, I pass over to Jordi Ferre.

Jordi Ferre

Thank you, William and good morning, afternoon or evening everyone. I’m happy to report again that we have made continuous progress in developing the global high purity Stevia market. It’s been said but I have to say it again launch in the carbonated soft drink which is the largest potential category representing about 40% of the overall potential market are rapidly accelerating across core brands and across all markets around the world. As a consequence, any key customer Reb A except inventory will stop to be an issue before the end of this fiscal year. Turning to slide 12, describing the graph more precisely during this first half period, the volume growth of high purity Stevia has been of 35%. The graph actually shows volume sales by quarter during the past five fiscal years. As you can see, sales have been accelerating specially during the past 24 months.

Turning to slide 13, the development and growth of the Stevia market remains a global trend and there is no distinction of markets of segments. The share of Europe in PureCircle sales has grown significantly over the past 12 months, as new launches accelerate in that region. As a consequence of those market development, our sales our less dependent today on one single market. We foresee the trend to continue based on the share of projects overall our current pipeline volume, which is the second high of the lower pie in the slide. You may notice that Asia-Pacific share of the pipeline may appear a little bit underdeveloped, but please be reminded that some of the regulatory approvals in that area are most recent like Indonesia and India are still pending.

Turning to slide 14 and returning to the topic of carbonated soft drinks. We are seeing a major trend of new cola launches which actually represent the single largest potential category. Large cola brands with 30% to 50% sugar reduction are being rolled out in number of markets and we expect this trend will continue in the next month. Turning to slide 15, beyond the reduced calorie cola trend that we’ve just described, we’re also seeing innovation in other carbonated soft drink segments with variant sugar reductions. This proves that uses of Stevia can achieve different [inaudible] mixes and product propositions. Turning to slide 16, I’m going to now look beyond the carbonated soft drinks market and I’m going to show you some examples of other significant beverage launches which have occurred around the world during the past six months. Flavor waters, juices, chocolate milk, coffee, tea and concentrates and across the world in markets is diverse as USA, Japan, Turkey, China, Germany or Brazil.

Turning to slide 17, this slide I’d like to remind everyone again that these launches have been able by certain unique Stevia 3.0 approach. This approach allows us to provide customers optimized solutions which combine our innovation, portfolio, application activities, Stevia indirect and flavors and as well as validation by US sensory testing. Turning to slide 18, talking about Stevia 3.0 which very important innovation part we continue to expand it and we’re able to meet all the application challenges. In this chart, you see that we are now confirming that we receive FDA GRAS approval for Reb M as well as FEMA GRAS for two new flavors. Turning to slide 19, all of this just described launches and Stevia 3.0 while our market support activities are approving its effectiveness as is measured in some key metrics. For social media [inaudible] newsletter. We are reaching thousands of key industry players on the advantages of adoption of Stevia. We are also fulfilling our vision for the Global Stevia Institute to become the authoritative voice for the Stevia industry. Over 40,000 visits from 159 countries from the GSI website is testimony of the success of this key initiative. Customers know that PureCircle is there for them when they decide to launch new products incorporating Stevia. Examples of such are collaboration with the Coca Cola Company to host an event during the European Congress visiting or providing Stevia resources and educational support for product launch by [inaudible] in Germany. We are definitely committed to continue with our Stevia focusing efforts.

And finally my last and final slide, I would like to summarize and close my update but we are certain that PureCircle is not only participating of the global Stevia market growth, but is actually enabling acceleration of Stevia adoption by customers and ultimately consumers around the world. How will we do that? Well let me say again, our key strategies an integrated supply chain innovation in Stevia 3.0 approach, customer support and a global infrastructure. And now I will hand it over back to Magomet Malsagov, our Chief Executive Officer.

Magomet Malsagov

I’m on slide 22 outlook. We expect to continue sales growth leading to improved profitability. Our strategy introducing new innovations to meet identified market needs continues to win business for PureCircle and to increase overall market for high purity Stevia. Carbonated soft drink launches and rollouts with Stevia are expected to accelerate however, determining the scale of these is still work in progress. We are collaborating closely with select global key accounts to plan out supply for short term, medium term and long term. Directionally we expect sales in second half of this fiscal year to be in the range of 55 million to $65 million giving full year sales of 90 million to 100 million. The growth is in line with our expectations and we remain confident that Stevia will emerge as a major global industry. Our business model is designed to service adoption of natural Stevia sweeteners and flavors by mainstream food and beverage brands and markets. The investments have been made and we are ready to prosper as adoption accelerates and sales volumes increase. With that we will move into questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we would now begin the question-and-answer session. [Operator Instructions]. And our first question is from the line of Sreedhar Mahamkali with Macquarie. Please go ahead.

Sreedhar Mahamkali – Macquarie

Yes hi. Good afternoon everyone. Four questions for me hopefully all straightforward. But firstly, if you could talk us through the gross margin drivers in the first half very impressive performance indeed as you were expecting it to be. Just slightly better than out on forecast, what are the drivers, better yield, better absorption of production costs if you can just give us a little bit more granularity around the big improvement? And how you see in the second half or comfortable FY15, how you see the gross margin evolving? Connected question I suppose is in terms of leaf sourcing, you referred to it in the presentation and how much of the leaf today is still from China? And where are we in terms of diversifying into Kenya and Paraguay now and can you just reiterate what your vision is on a two to three year view? So that’s one second leaf sourcing. And third one, in terms of your revenue guidance are you building in any demand uplift that you might be expecting from global beverage key accounts? If not, how should we think about it? And the last one is, if you were able to talk a little bit about from the competitive landscape in terms of competitive, are you using the same extracting methodology of fermentation, methodology as we hear every once in a while one of your Swiss based competitors and indeed any other non-Stevia competitors such as Senomyx etcetera? Those are the four questions. Thank you.

Magomet Malsagov

First question will be addressed by William Mitchell.

William Mitchell

Sreedhar, good afternoon. The PureCircle business model operationally did the gross margin improved with volume we’re volume is driven business. In H1, there was a strong increase in volume and that gave rise to good improvement in gross margin. We expect the same level of margin to continue into the second half and then looking further forward into the future, as our volumes increased, we would expect to see a margin improvement. To remind you, our production capacity can support in excess of 250 million to 300 million in sales. FY13 we did [inaudible] million so we are still operating a long way below capacity. So we have a lot of scope gross margin improvement. In addition Sreedhar, the benefits of the Stevia 3.0 innovation is that we are creating more value.

Magomet Malsagov

All right. On leaf sourcing I think that was the second question. I think this year this financial year, our leaf from South America and East Africa will contribute probably around 25% to 30% if not more. Moving forward, next fiscal year onwards I expect that ratio to increase. Our target is to have a well balanced supply and without being dependent on one particular region. But just to emphasize our scale in South America and East Africa is gearing up and is becoming important contribute. In terms of revenue and the third question I think I will ask Jordi to address.

Jordi Ferre

I’ll address that. One thing I would like to remind you that, I guess this question was referred to the Reb A beverage global key accounts. First of all, the Stevia 3.0 approach means that we’ve been selling other ingredients to beverage global key accounts and that’s been going on for a while. Going back question about Reb A, we will see some impact before the end of this fiscal year on our sales. The last question was about fermentation and other technologies I guess.

Sreedhar Mahamkali – Macquarie

Yeah and in general, what you see as competitive landscape because I think we’ve come across a product range from Senomyx referring to Pepsi’s trials etcetera. So if you just let out your thoughts on those things that would be helpful.

Jordi Ferre

Well in terms of new ways of producing Stevia like fermentation or biosynthesis, our technology is nothing new. I mean we’ve seen within other ingredients like most notable one is citric acid a good example. And I – without going into too much detail I will tell you all that we do not specifically highlight our innovation. There are no areas we do not cover, and there are no areas we are not prepared to engage in if the market will. With that said, we will leave it to market to determine when this technology will be ready to access it and the key debate around this will be obviously natural and definition of natural and other things. With that said, we are ready with alternative technologies etcetera. About other things that would compete with Stevia whether it’s a sugar enhancer or flavors, there are lot of things going on out there both different companies, a lot of innovation activity R&D activity and we are also working on things all type Stevia as well. The key here is naturals. And there are a lot of very good ingredients out there that unfortunately can’t swing natural and our core is around that particular war.

When it comes to natural, your ability to innovate is drastically reduced. You are bound to certain frameworks beyond which you can’t go without infringing that particular claim. Therefore we believe it’s not going to be easy to introduce anything that would be seriously competitive enough keeping it natural basically that’s our belief based on our experience over many years. So yes innovations are there some of them actually complementary to us because Stevia as we all know is still work in progress and you need some areas to help Stevia to go into certain applications etcetera. So some review innovations are supplementary, but Stevia is natural and that’s not for us to determine that’s for market our clients to determine. But if people come up with something natural, an alternative that meets the cost requirement, that meets the supply chain requirement, then we would consider that a competitive threat, but we don’t see anything at the moment.

Sreedhar Mahamkali – Macquarie

That’s very helpful. Thank you.

Operator

Thank you. Our next question is from the line of Julian Lakin with Mirabaud. Please go ahead.

Julian Lakin – Mirabaud Securities

Good day, gentlemen. When I look at the margins again and following up from Sreedhar’s question, did I correctly hear you say that you expect the same level of gross margin in the second half as the first half? And that would probably surprise me considering the volumes are going to be such high considering operation gearing, what would probably expect the gross margin could be somewhat higher in the second than the first? That’s my first question. And also from that is can you talk a little bit about the variable contribution margin which is the level which is not being discussed in this call, but you had talked about quite a lot historically where that stands versus last year? That would be helpful. Thank you.

Jordi Ferre

Julian, thank you for your questions. So the margins we anticipate the second half to be of the same level as the first half. In terms of the variable contribution margin, our long term business model is the variable contribution margin to be in excess and that we expect to carry on everything all the performance continues to underpin that that is the case. And that is benefit of our innovation because as you know leaf is majority of variable cost and our innovation is enabling us to deliver more solutions to our customers from the same leaf source.

Julian Lakin – Mirabaud Securities

Thank you. And you’re slightly cutting out, did I assume you’re saying variable contribution margin to be in excess of 50% so the cord cut out when you’re just about to say that can you clarify that?

Jordi Ferre

Julian that is correct. Variable contribution is in production net absorption.

Julian Lakin – Mirabaud Securities

Exactly. And just – could you just sorry to be pedantry on this one can you actually say why you don’t expect any uplift in your gross margin on H1 levels and H2 despite them because of similar sales volumes?

Jordi Ferre

Julian it would be sales mix in the second half.

Julian Lakin – Mirabaud Securities

Right. Okay. Hello sales mix in the second half okay. Thanks very much.

Operator

Thank you. [Operator Instructions]. Our next question is from the line of Sophie Jourdier with Liberum. Please go ahead.

Sophie Jourdier – Liberum Capital

Yes good afternoon. Just got a few questions with regards to your new product, you already had great success with them and you mentioned 12 products now commercialized. I wonder if you could sort of pick out perhaps that you see are already driving the growth for you at the moment give us a little bit color as to the key reasons that proving so popular? Second and related question, these new products 70% of your volumes now, but I guess Reb A is somewhat underrepresented given the absence of demands from some of the global key accounts. I wondered if you could give me an idea of what you think usage – the percentage of usage now in the market is of your Stevia 3.0 products versus Reb A? And then finally, the last question again on one of the new innovations on Reb M which you’ve announced in the last year developing with Coca Cola. I just wondered can you just give us some background as to why with this particular you decided to work with a partner. Obviously with the other products you’re developing these by yourself. Those were the three questions thanks.

Magomet Malsagov

I’ll ask Jordi to take the three questions.

Jordi Ferre

Yeah I think the question was the first one we have 12 products in our portfolio these new products are successful hope that was the question what you’re trying

Sophie Jourdier – Liberum Capital

Yeah just talk us through

Jordi Ferre

So the answer is because every application and every different customer application is different and requires a certain number of customized solution. So the more possibilities you have in combination in brands or combinations or individual and ingredients and that’s what Stevia 3.0 does, gets you [inaudible] to get to the success. So every time you want a new product, you are able to actually modulate through a certain phase on application needs.

Sophie Jourdier – Liberum Capital

Okay, thank you. The question actually in a way was trying to pinpoint whether there were any of the particular 12 products that are really driving the growth whether if it’s a blend of all of them?

Jordi Ferre

There is some products that have more universal application that are driving more of this growth. Obviously the core sweeteners are but the other flavors for instance are also showing very, very strong growth. I would say that the whole entire line is actually growing steadily.

Sophie Jourdier – Liberum Capital

Okay. Thank you.

Magomet Malsagov

On your last question about Reb M and Reb B partnership with Coca Cola Company, just to remind the overall approach to market by PureCircle is generally, we keep our ingredients non-exclusive. With that said, we are sometimes open and we do partnerships with industry leaders on one or the other areas. A good example is NSF-02 was a flavor company called Firmenich which is an exclusive arrangement. So Reb M with Coca Cola was – we got to a point where it made commercial sense for us to do this with the largest beverage partner and client and consumers. And the board decided that, that was the right approach to commercialize this ingredient. But long-term and why the strategy for PureCircle is to make sure the industry, the food and beverage industry in general has access to all our innovation at some point. So when do you need to commercialize certain ingredients and it is the best way to do it is with a partner. Cases like this we sometimes do that so that was the case Reb M and Coca Cola Company. And also if you go back to our announcement, we joined you have to take that into account as well.

Sophie Jourdier – Liberum Capital

Yeah sure. Thank you. And just the other question I had was why you felt usage of Reb A was as a percentage of the market today because obviously that the your numbers are underrepresented at Reb A at the moment?

Magomet Malsagov

Jordi?

Jordi Ferre

Yeah so the question is what is our share of the Reb A?

Sophie Jourdier – Liberum Capital

Not Reb A what is Reb A’s share of the market today?

Jordi Ferre

Okay. So it’s an estimation I want to give you but I believe that usage wise it would be about 50%.

Sophie Jourdier – Liberum Capital

Right. Thank you very much.

Operator

Thank you. [Operator Instructions]. Our next question is from Charles Pick from Numis. Please go ahead.

Charles Pick – Numis

Good afternoon gentlemen. I’ve got four questions I’m afraid. Firstly, I think a year ago you said the percentage of the sales for the beverage global key accounts is about 25% of volume and about two thirds of the volume was beverage customers. I wondered if you could give a general update on those figures please. Secondly, on the Asian sales figure is only up 0.5% was there anything specific that sort of restrained you in that area apart from the delayed regulatory situations that did get mentioned? Thirdly, is it possible to give you an update to Reb B as there’s been a lot of use general news recently? And a final point the sharp fall in the price and also the fall in the world sugar price have they had any dent in impact do you think on the uptake of tevia products?

Magomet Malsagov

Hello Jordi will answer the first two questions.

Jordi Ferre

So first one was and this was year ago we said that potential of sales global beverages was 25% of volume, but at long term, we said two third of volume would be for beverage customer correct? What is the position now year ago sales and beverages by the inventory that’s correct?

Magomet Malsagov

And I think we made progress there in percentage but we are still a way to go to the fulfillment of the two thirds.

Charles Pick – Numis

All right. Okay. Thanks.

Jordi Ferre

And the second question on Asia Charles is more in accounting we’ve – the fact that we’ve opened up more entity means that we have less direction from Asia. So some of the Asia sales that we’re reporting to Asia are in 2013 now go directly from other geographies so 0.5% is correct from the financial statement but the underlining trading Asia is coming pretty stronger than that.

Charles Pick – Numis

Okay, thanks.

Magomet Malsagov

Why don’t you Jordi talk about the sugar prices?

Jordi Ferre

So sugar price coming back to your question of sugar price affecting our sales. We again thanks to our Stevia 3.0 approach we got solutions that can economically be even so in the phase of some other markets sugar reduction price. Again sugar prices vary from market to market generally speaking, we are always able to provide savings against the sugar price even with the conflicts of today’s situation. What was the question again

Magomet Malsagov

The Reb B?

Jordi Ferre

The Reb B question once again – general Reb B actually been very, very well received by customers. We are making commercial progress and I will stop short of saying anything else.

Magomet Malsagov

It’s a product that goes to market on a non-exclusive basis and with that said, we will be selective with who we supply due to availability.

Charles Pick – Numis

Good. Thank you very much indeed for that.

Operator

Thank you. And I’m showing no further questions. I’ll turn the call back over to management for some closing comments.

Magomet Malsagov

Well thank you very much for your time. We are generally – to summarize, we are very positive about the progress that we made to-date. We believe we are at the point of referring in terms of market acceptance in terms for Stevia. I think from now on moving forward, you will see steady good growth again it will not be a straight line, but it’s going to be steady and essential growth moving forward next three to five years that’s our belief based on what we see is happening particular in carbonated soft drinks category and what we know is in the pipeline. So we’re very optimistic and positive and look forward to talk to you in September with good full year results. Thank you very much and have a good day.

Operator

Ladies and gentlemen this concludes our conference. Thank you for your participation. You may now disconnect.

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