DFI Retail Group Holdings Limited (D01) Earnings Call Transcript

Good morning, everyone, and thank you for attending today's investor call to discuss the reorganization of DFI Retail Group's interest in Maxim's and Starbucks licensed business. I'm Karen Chan, Strategy and Investor Relations Director. Joining us today from our management committee are Scott Price, Group Chief Executive; Kaizhi Wu, Chief Financial Officer; Ella Chan, Group Chief Strategy Officer; and Andrew Wong, who will be leading both the license business of Starbucks and IKEA at DFI. Following the prepared remarks, there will be an opportunity to ask questions. Please submit your questions on the platform, and we will direct them to our speakers. Today's presentation is being webcast in its entirety. As a reminder, this call is being recorded. Press release and slide presentation regarding the transaction are available at the Investor Relations section of the DFI website. Before we start, I would like to remind you of the following regarding the information to be provided during the presentation. The information about to be presented is for information purposes only and is not intended to be investment advice for any person. There's no intention to invite for any dealings in any securities. There may be forward-looking statements mentioned in the presentation materials which include statements regarding our intent, belief, or current expectations with respect to DFI Retail Group's businesses, operations, market conditions, et cetera. You are expressly advised not to rely on these forward-looking statements as they are subjective views, which are subject to risks and uncertainties. And with that, I'll pass it over to Scott. Scott, please?

Thanks, Karen, and good morning, everyone. We do appreciate you joining us on short notice for a bit of an update on yesterday's announcement. Where with Hong Kong Caterers, we have agreed to a reorganization of the Maxim's business. Maxim's consists of a number of restaurants, the Starbucks coffeehouses and a branding and branded product and manufacturing business. We will be taking from this joint venture, which has existed for many, many years, the 1,100 coffeehouses across 7 Asian markets. Those markets are Thailand, Hong Kong, Macau, Vietnam, Singapore, Cambodia and Laos as well potentially the right to engage in franchises in other similar markets. We've had a partnership, as I said, for almost 40 years with a 50-50 structure. And it's really grown into one of the leading food and beverage organizations in Asia. One, we're very proud of having been a part of for so many years. But we believe the reorganization is the right thing for DFI. We will transactionally transfer our 50% stake in Maxim's to Hong Kong catering in exchange for the entire Starbucks license business, which we believe positions both companies now for a next phase of growth and believe that this really does fit well with our overall operating model at DFI. This is a final milestone in DFI's move from a portfolio company that included many positions of minority where Board seats was the process by which we influence the business to only an operating company with full operating control of all of the aspects of the business. DFI and Maxim's through Hong Kong -- and Hong Kong catering through Maxim's. We're going to remain strategic partners. There are many synergies that work for both companies across procurement, supply chain, and as well our overall Yuu program of which Starbucks is a member. The transaction itself is immediately accretive to DFI's revenue and operating model, and Kaizhi will talk about that in a few slides. In addition, we will receive $340 million in cash, which we will recycle to either higher return growth initiatives, potentially inorganic, and we have shared previously, the framework by which we look at that or potentially as well return to shareholders. The next slide, please. The structure of it, as I've mentioned, is 50% transfer of our Maxim's shares to the Hong Kong catering entity. They will in exchange transfer the Coffee Concepts business, the legal entity name of the Starbucks licensee. As well, we will receive $340 million, representing the value differential to the 50%. We will assume the entire interest in the Starbucks licensee business named Coffee Concepts. Hong Kong Caterer will become the sole shareholder then of the Maxim's business, which we think is going to be, I think, good for both companies, as I mentioned. Andrew, who's joining us, and we'll talk a bit in a few minutes. So he'll become the Chief Executive Officer of both the IKEA and DFI license businesses. Andrew has a background in working in the food industry franchise and as well as Pacific Coffee, a local chain here in Asia in his background and a passionate coffee lover. So that's always helpful when you're going to spend your life in coffeehouses. And we will continue to work on the basis of a very good relationships with the Starbucks company based in Seattle and have already had a number of very good conversations with them. The transaction is targeted to complete by end of Q1 next year. subject to standard closing conditions. Next slide, please. In terms of some of the core details, revenue in 2025, $746 million the CAGR '23 to '25 of 3.5% as of June, a little over 1,100 coffeehouses. And underlying operating margin of 7%. And to the left, you can see the map, which shows the layout, including that the Thailand business is by far the largest. We really do see this as a good strategic fit with DFI's portfolio in many of these markets. We see an opportunity to not only share procurement but as well the opportunity to work together on property and as well ready-to-eat food. This gives us a leading market position in specialist coffee. And as well, I'd remind relevant to Asia that there is a tea shop segment as well that has included Teavana, which we think is an interesting opportunity as well. And it's quite a complementary footprint to our focus on Asia. And as we have said, that is absolutely where we will operate and would not consider moving outside of Asia. If I move to the next slide, again, showing here a 16% share today across a $3.8 billion market, growing at 5%. The business covers some of the highest per capita coffee consumption markets globally. Vietnam, a major coffee producer, Thailand with a very deep coffee tradition, Singapore, strong cafe culture and of course, our headquarter country of Hong Kong, where you see a very substantial beverage culture across both coffee and tea. So we are now going to be able to build upon that 16% market share where we believe that there is currently an underpenetration of, I'd say, quality coffeehouses and therefore, a substantial opportunity to grow the business. Thailand, Vietnam, where coffeehouses penetration is low is where we will initially focus our growth. And we see, obviously, the opportunity to drive an even greater amount of coffee and tea consumption in Hong Kong and Singapore as well. We have, through various parts of our business, created quite, I think, a strong capability and innovation, and we'll apply that innovation across the coffee category in collaboration with Starbucks. But as well looking at milk tea and refresher categories as well. Next slide. So from a strategic rationale, as I said, this was a final step, moving ourselves to a focused operating company, which I believe is an ability then to drive superior returns to shareholders. The everyday community coffeehouse, we think, brings with it strong heritage and brand loyalty. Obviously, Starbucks is one of the world's most iconic brands, not only known for just great coffee, but there's a culture around the coffeehouse. And I've had an opportunity to visit the Starbucks coffeehouses across multiple markets. And it's amazing the continuity that, that format brings relative to just that sense of community. We believe this fits with our overall purpose statement of sustainably serve Asia for generations with everyday moments. And clearly interacting in coffeehouses and tea is an everyday moment for our customers. We do, as I said, see opportunity in high-growth Asian markets, Southeast Asian markets, Vietnam and Thailand to increase our growth, and we're targeting a total of 250 new coffeehouses by the end of 2029, primarily driven by Vietnam and Thailand, but we will continue to look at the Teavana and the tea house opportunity. As I said, synergies exist, we believe, through food assortment and operational excellence, procurement optimization and a deeper integration with Yuu. There is, I believe, a profit opportunity here. Andrew will talk about how we are initially looking at where we will find synergy. And then as we get into 2027, we will schedule another Investor Day to be able to give, I think, a more complete guidance from the total DFI business, and we'll be announcing that date in some point in the near future. And then importantly, it enhances the data richness to the DFIQ monetization, bringing a substantial amount of transactions as well to this process. And so with that, I'm now going to turn this over to Andrew.

Thank you, Scott. Good morning, everyone. For many of us, a good cup of coffee is essential to starting the day. And in many of our markets, the Starbucks coffeehouse actually owns the morning occasions. For us to maintain this leadership, we will continue to expand our coffee and beverage platform with dedicated category menus. So for example, matcha, chai and enabling greater personalization and meeting evolving consumer demand for functional drinks like protein. We will continue to evolve our breakfast and bakery assortment to drive food bundle and higher ticket size. We also see a significant opportunity to build more Starbucks occasions throughout the day. We will be accelerating food innovation, which is critical to this strategy. That includes broadening our savory offering with premium all day snacking and grab-and-go options that appeals to afternoon consumers who are seeking convenience and quality. We will also localize our F&B assortments to reflect regional taste and preference leveraging learnings from our CVS business to adapt quickly to local demand. We will also be creating excitement through cross-brand collaboration. For example, partnership with local bakeries, specialty food brands to drive excitement and repeat purchases. As we unlock lunch, afternoon and even evening dayparts, we aim to become the all-day destination for our customers. We see clear revenue upside and cost synergy benefits from increased scale and expanded reach across complementary regions and channels, 5 of the 7 markets that Starbucks is operating in right now, we actually have other DFI format presence and this anchored around our DFI strategic deliverables. On the previous slide, we actually talk about our plan in accelerating F&B innovation to better cater to local needs, sense of place and also evolving consumer preferences. In terms of getting access to customers, as Scott alluded earlier, we see room for coffeehouse growth and underserved markets with disciplined guardrail around site selection. This includes second-tier cities and provinces, especially in Thailand and Vietnam, where currently we have minimal presence. Our plan is to expand our coffeehouse footprint by at least 250 for the next 3 years. We actually see great synergies coming from primarily 2 areas. First of all, operational efficiencies, which reflect procurement and sourcing ability. Best practice sharing across services and real estate optimization as we extract greater value across a wider store portfolio. Second is driving stronger business performance by deepening loyalty through data-driven personalization and targeted offers to improve customer engagement. With that, I'll turn it over to Kaizhi to discuss financial implications.

Thank you, Andrew, and good morning, everyone. Following Scott and Andrew's introduction of the deal and our strategy on a Starbucks license business. I will now use the next few minutes to briefly talk through the financial impact of the deal. As Scott and Andrew pointed out, the fundamental strategic rationale of this transaction is for us to increase our exposure to a higher-margin business in faster-growing geographies while taking full operational control over the entirety of our business portfolio. So after the deal, DFI will fully control and consolidate a business currently with an annual revenue run rate of over USD 800 million. and that's having been growing at over 5% CAGR over the last 3 years. And assuming we complete the deal by end of Q1 2027, it will add around USD 600 million to USD 650 million of revenue to DFI's consolidated P&L in 2027 and approximately USD 900 million on a full year basis in 2028. Apart from adding into DFI's total revenue, Starbucks' existing operating margin of over 7% is also accretive to DFI's current margin profile. On top of that, we have identified, as Andrew mentioned, we have identified several areas of potential synergies between DFI and Starbucks that could potentially improve the operating margin by another 1 to 2 percentage points over the next couple of years. And that will make Starbucks license business the second most profitable business format at DFI. And with the margin accretion from Starbucks, we have greater confidence in achieving our 5% to 7% overall operating margin target by 2028. Here, we have also -- we would like to also share with you some wider financial implications to DFI from this transaction. Together with the Starbucks team, we will accelerate Starbucks license business revenue growth to between 6% to 7% per year and create a $1 billion business within the next 3 years. And this will be achieved by executing the current coffeehouse expansion plan, especially in high-growth Southeast Asia markets such as Thailand and Vietnam, as Scott and Andrew just mentioned. So with a net increase of at least 250 coffeehouses, we aim to grow our regional Starbucks footprint to over 1,350 coffeehouses by 2029. Meanwhile, we also plan to improve the same-store sales, especially with more food and drinks products innovation. As Scott and Andrew mentioned earlier, we see various synergy opportunities between Starbucks franchise and DFI's existing formats. This includes areas such as sourcing, procurement, property and customer experience. We estimated around USD 10 million of operating synergy in the first full year after the consolidation and after the completion, with additional benefits ramping up in the subsequent years. And by working closely with the Starbucks team, we are able to unlock these synergies to deliver operating margin upside for Starbucks. Now while this deal has clear strategic and commercial value from accounting point of view, it will create dilution impact to the DFI's EPS in the initial years. And this is because after the deal, DFI will no longer pick up the profit from Maxim's restaurant and mooncake businesses through equity accounting. However, apart from receiving cash consideration of $340 million, as part of the deal to effectively compensate for the profit dilutions upfront. We are confident that such dilution impact will be mitigated by realizing business upsides, as mentioned earlier, as well as by the value-accretive M&A to further accelerate growth. Despite the initial earnings dilution, we expect the transaction to be free cash flow accretive within the first 12 months. And that's given the very strong cash generation of the Starbucks license business. And as a result, we remain confident and committed to deliver our 2028 underlying PATAM guidance of $310 million to $350 million, which was outlined in our 2025 Investor Day. We will be providing more detailed financial guidance at our full year result announcement and that's when we are approaching the completion of this transaction. Last but not least, given the continuous momentum of our business and the expected cash inflow from this transaction, we will increase our dividend payout ratio from 70% to 80% in order to support the continued growth in dividend per share and our commitment to drive shareholder returns. While we will continue to look for opportunities to reinvest the cash consideration, as Scott mentioned earlier, we will return excess capital to shareholders if there's no appropriate target in the medium term. Next page, please. So before I pass on to Scott for his final remarks, I would like to quickly wrap up and sum up what this transaction means to DFI. We are taking full control of a higher growth and a profitable business within the Maxim's current portfolio and very importantly, together with cash to drive further shareholder value. By having the Starbucks license business closer to our existing core businesses, we are able to expand our direct presence into more growth markets, and we will create a bigger revenue base to realize higher efficiency gains, and we will improve product innovations and customer experience to deepen our share of customer wallet. We do see significant opportunities to work with the Starbucks team to drive an even stronger performance from this beloved brand. And this will also be supported by driving better customer experience through the loyalty programs. And with all this, we are building a stronger, more focused more competitive and faster-growing DFI that is well positioned to capture the opportunities ahead and deliver greater value over time. With that, I'll pass it back to Scott for final remarks.

Thanks, Kaizhi. So we've already mentioned many of the comments on this slide. I would probably make an overreaching point, which is DFI and our focus upon everyday moments and importantly, our relentless focus upon a value proposition while also providing customers with affordable treats as it were, has paid dividends. You will have seen in our first half, quite strong growth. But interestingly, we are seeing in Asia now growth in aspects of everyday life. Hong Kong, for example, retail sales back to 9% growth. We do see this as not only in the short term but also mid and long term, a huge opportunity for DFI, our portfolio and our formats to continue to create a high level of synergy and thus not only a great value for our customers, but also great returns for shareholders as we continue to deepen the cooperation between formats, continue to drive our omni platform, which is ensuring that we are meeting the customer wherever they want, both online and offline while also, I think, focused upon that dividend yield, you'll see here at 5%. So we do think that this is an important step towards creating the DFI of the new. I would reiterate that we do have an active inorganic strategy that is very focused upon existing businesses in Asia that give us accretive TSR. And if we do not, as Kaizhi mentioned, in the midterm, see anything that justifies, well, that's fine. We would see a potential return to shareholders but we have a very strong balance sheet, which does not then preclude in the future, leveraging our balance sheet if something that we believe fits our strategic filter comes to fruition. So with that, I'm going to hand it back to Karen for Q&A.

Thank you, Scott. And with that, we'll open up the floor for Q&A. [Operator Instructions] Our first online question comes from Jeff Kiang of CITIC CLSA. I have a couple of questions here. My first question is about how do we view the Starbucks competition with other low-cost operator in these markets? What are our right to win in operating the Starbucks franchise? My second question is about the growth and margin guidance. How comfortable are we with the outlook given? And what are the low-hanging fruits DFI can do immediately to drive savings and synergies?

So on the first question, I'm very comfortable, I'm going to hand it over to Andrew, who's far more of an expert than I in the coffeehouse world. But believe that based upon financial results and how we see the business a great right to win. And then maybe, Kaizhi, you pick up on the second growth and margin perspective. Andrew?

Thank you, Scott. Thank you, Jeff, for your question. I think the key thing is we are going to maintain our proposition as a community coffeehouse centered on in-store experience, while also introducing locally relevant flavors with a touch of personalization rather than competing purely on price point and transactional convenience. We have the opportunity to make Starbucks an all-day destination by accelerating food innovation, local sense of place, like food range, protein, gluten-free. There's a lot of opportunity there. And also, we understand that customers are always excited about cross-brand collaboration. And we think there's a lot that we could do in that area with such a powerful brand. We will also leverage on loyalty programs to actually make sure that we encourage food redemption and improve food penetration in the traffic.

Yes. In terms of the financial guidance on revenues and margins. So our current business plan on Starbucks has been relatively prudent and that's predominantly based on the historical trajectory of Starbucks over the last 3 to 5 years. It has been growing at around 5% to 6% CAGR in the last 5 years and at the margin at around 7.5%. So that itself. So the base -- the starting point of the Starbucks business has been very solid and strong. As mentioned -- as Andrew and Scott mentioned earlier, we did identify based on initial assessments, we did identify a series of synergy opportunities by integrating better and deeper with the DFI businesses, and that's across property, across COGS, rental, CapEx even retail media and customer proposition. So we believe that by working closely with the DFI team, the Starbucks -- the operating margin of the Starbucks business can be improved by another 1% to 2% to around 8% to 9% in the next 2 to 3 years. So that will bring Starbucks business to be closer to a -- one of the most profitable business within DFI.

Next question comes from Jayden Vantarakis from Macquarie. Are there any implications on the ready-to-eat strategy at 7-Eleven following this transaction? As Maxim's has been one of the strategic partners for the RTE product.

I'll cover that. So we have leveraged Maxim's overall manufacturing capabilities to provide some of our 7-Eleven ready-to-eat product. And we ensured always that, that was an arm's length transaction that we managed the innovation relative to recipes and proposition. Maxim's would bid for the business. They would provide a quality product at a great price delivered to our specifications from a replenishment viewpoint and bid and won that business. That will continue. We see the same approach then occurring with the Starbucks business that we will manage the innovation, the recipes, the opportunity to drive a different portfolio of products and assortment and Maxim's would, of course, be one of the well-known and trusted brands that we would go to for manufacturing. But of course, would have to be managed at an arm's length relative to, again, quality and the replenishment cycle. So we see it as a very good relationship today. They are obviously, in particular, for North Asia experts in food manufacturing. So seeing no impact and an opportunity to continue to further a good relationship.

Thank you, Scott. Next question comes from Zheng Feng Chee of DBS Bank. Is there any other divestment that we should be expecting following this transaction? And any other further updates in terms of M&A plans and time line?

No, we do not have any active conversations around further divestments. As I said, this is the final step in our move from a portfolio to an operating company. We previously have divested our holdings in Yonghui, then Robinsons. I think the joint venture in Maxim's represented that final step. Right now, we are across now 5 formats which is food, convenience, health and beauty, home furnishing and now coffeehouses, coffee and tea houses, and full operating synergy control means that we think that's a very powerful combination. We have an active M&A perspective in the market, and it would be across bolt-on or incremental that would further those 5 formats in terms of shareholder returns. But if we don't see a win for customers and a win for shareholders, we would move forward. As I said, in the midterm, we now have a, I think, good cash bank of $340 million that were the proceeds as a result of the 50-50 balancing of the transaction with Starbucks. But if we choose at some point to return that to shareholders, still a very strong balance sheet that allow us great flexibility to continue to pursue strategic bolt-on acquisitions that continue to further our strategy.

Next question comes from John Lam of UBS. My first question is about how should we think about 2027 underlying profit growth given the loss of Maxim's profit contribution, partially offset by Starbucks. Second question is, can management comment about the revenue mix for Hong Kong versus ASEAN markets for the Starbucks franchise?

So Kaizhi, why don't you handle the first, and then I'll touch on the second.

Yes. Thank you, John. So before I touch on the Starbucks contribution or the Maxim's contribution, I'd like to make the point that we are very on track on delivering our 2026 and 2027 profit target that we communicated earlier for the underlying or core retail businesses within DFI. So as I mentioned earlier, due to the changes of basically the portfolio. And from an accounting point of view, we have to remove the equity accounting our share of profit from Maxim's from basically April 2027 onwards. And we -- the addition or the consolidation of Starbucks profit at this point cannot fully compensate the loss of profit from share of profit from Maxim's. And we'd expect the profit dilution or the current difference is around $35 million to $40 million for the initial year. However, as I mentioned earlier, number one, we get cash upfront to compensate for that differences. So that's number one. And number two, over the next 3 to 5 years, probably more than a 3 years period, we have had the plan under Andrew's leadership to drive additional upside and synergy from the Starbucks business to -- through organic only, we will be able to mitigate the profit gap in the next 3 years' time.

And on the second question, John, we continue to look for opportunities to balance the portfolio. Obviously, with Thailand is the largest market and with our growth focus upon growing in Thailand and Vietnam. That will be -- continue to be, I think, an upside to that balancing strategy. Given that 2027, it's only 3 quarters I'm going to hold on a specific, probably multiyear commitment as to where we would see the revenue balancing between Hong Kong and ASEAN. What I would say is both markets are in the formats in which we compete. We're seeing healthy market development as even in markets where potentially there has been some economic challenges. We see great opportunity for growth. We are in everyday essentials. I'd like to say, no matter what happens, when you get up in the morning, you want a cup of a coffee, you're going to take a shower, you're going to eat your breakfast, you're going to stop for a snack, and we provide all of those. So at probably the -- either the full year results or our Investor Day next year. I'll get into a little bit more detail as to where we see the revenue mix progressing in a 2- to 3-year framework.

Thank you, Scott. Next question comes from Willer Chen of Mizuho Securities. What's the biggest driver for that 1% to 2% operating margin expansion we're expecting in the future?

Andrew?

Thank you, Willer. Well, as we've mentioned earlier, we are seeing opportunities in terms of the synergy we have in terms of the cost base where we operate in 5 of the 7 markets with the other DFI business. So in terms of procurement, there's going to be a strong opportunity and also property as well that will be having synergies with what we are currently having.

And probably, Andrew, you would, I think, see an opportunity to leverage our property with negotiating with landlords as we think about growth moving forward, the opportunity to do stores side-by-side then importantly, supply chain because there is obviously quite a bit of movement of goods across these markets. So I think as Kaizhi said, 3 years, -5 years would be way too long, guys. So 3 years, we are looking for that opportunity to add that 100 to 200 basis points of synergy.

Next question comes from Yuxin Zhang from CICC. Within your revenue growth guidance of 6% to 7% CAGR in the next coming few years, can management comment about the level of like-for-like sales growth within the assumption?