@ FOOD EMPIRE'S AGM: 8 questions on Caffe Bene, growth, accounts, etc

L-R: Chief Operating Officer Tan Joon Hong, CEO Sudeep Nair, Executive Chairman Tan Wang Cheow, CFO William Fong.

Photos by Ong Chin Keet

Food Empire's strong core earnings in 2017 coincided with a US$7.7 million impairment charge on its Korean associate, Caffe Bene.

As a result, net profit after tax stood at US$13.3 million, down 3.7% y-o-y.

This year, its financial statements have no overhang from the struggles of Caffe Bene, as Food Empire's management emphasised.

Executive chairman Tan Wang Cheow and CEO Sudeep Nair fielded questions on Caffe Bene and other aspects of the business. The following are edited excerpts of several questions and answers at the AGM:

Q: Food Empire's ingredients business has grown dramatically over the years. Last year, it grew 90% to US$19 million. I'm assuming there's still a lot of growth left. Could you give us some background on the market size and the potential market that you can chase?

Mr Tan: We sell ingredients to ourselves and to external parties. For the OEM business, we had about US$28 million revenue last year. About US$18 million came from the non-dairy creamer business and US$6 million from potato chips.

Food Empire produces non-dairy creamer which it uses internally (for its 3-in-1 coffee products) as well as sell to its OEM customers.  Photo shows printing of packaging for Food Empire's MacCoffee products. 
NextInsight file photo.Our instant coffee plant, which has been operating in the past two years, has done quite well. Last year, it recorded roughly US$5 m of revenue.

We have announced a second coffee plant in India and we hope to get it up and running by 2020 and it will give us a substantial amount of turnover as well in the future.  

Q: What is the payback period for this plant -- given, I think, the US$11 m or 12 m in equity and US$30-40 million in bank loans?

Mr Tan: It depends on two things -- the selling price at that point of time and the cost of the raw materials, the coffee beans. For the purpose of our budget, we typically consider 8-1o years for the payback period.

Q: I noticed 2017 spending for advertisement and promotional expenses has dropped to US$23.6 million from US$27.8 million. The annual report referred to a one-off reclassification of the A&P expenses. Could you tell us how the "reclassification" works?

Executive Chairman Tan Wang Cheow.Mr Tan: There was a change in the trade law last year in Russia, so US$2.5 million of expenses was reclassified as it was charged against sales.

As a result, the turnover came down by US$2.5 million. The Russian sales growth actually was 10%, instead of about 8%.  

Q: Vietnam forms the majority of your Indochina sales. In 1Q last year, there was reduced revenue. Can you explain the effects of the Vietnamese new year holidays and update us on the competition?

Mr Tan: In 2017, the Tet Holiday fell in January and people normally stock up the goods in December. In 2016, the holiday fell in February.

For iced coffee, according to AC Nielsen last year, we achieved close to 80% market share in Vietnam. That's substantial. In 2014, our sales was about US$10 million but in the last two years was about US$40 million -- it was quite a jump in percentage terms.

CEO Sudeep Nair.Mr Nair: To add, the competition has been very tough -- all the major players have launched or relaunched products similar to our Cafe Pho and they have been very aggressive. In spite of the competition, we are quite satisfied with our results in 2017. Moving forward, we hope to see better results because the foundation has been set.

Q: How is our coffee capsules business doing?

Mr Nair: It's a niche segment but it's growing in some parts of the world but not specifically in the regions where we are working, which is mainly emerging markets. This is about diversification of our revenue.

We have a very good distribution system in the markets where we operate, and we want to be prepared. If the markets grow maybe in two years, this product gains momentum in our markets, we have a distribution system and our own brands which we are launching.