Lotte Wellfood and Lotte Chilsung Beverage, the food affiliates of Lotte Group, posted mixed second-quarter results this year. Lotte Wellfood saw a sharp increase in operating profit on the back of strong overseas operations in India and Kazakhstan, while Lotte Chilsung Beverage's profitability deteriorated as overseas subsidiaries faced higher cost burdens.
As both companies are increasing the share of their overseas operations, some said whether their results improve will depend on the growth and profitability of their global businesses.
According to the Financial Supervisory Service's electronic disclosure system on the 23rd, Lotte Wellfood(280360)'s second-quarter revenue on a consolidation basis came to 1.1557 trillion won, up 8.6% from a year earlier. Operating profit for the same period rose 88.5% to 64.7 billion won. That is 32.6% above the market consensus of 48.8 billion won.
Overseas operations drove the improvement. In the second quarter, Lotte Wellfood's overseas subsidiaries posted 311.2 billion won in revenue, up 27.6% on-year, while operating profit jumped 132.5% to 29.6 billion won. In particular, the India subsidiary's revenue increased 27.9% to 133.4 billion won. As the new ice cream plant in Pune, India, completed last year, has stabilized, peak-season supply volume increased, and Choco Pie sales were also strong. Revenue in Kazakhstan rose 39.7% to 84.8 billion won.
Kwon Woo-jung, an analyst at Kyobo Securities, said, "Lotte Wellfood's overseas subsidiaries significantly improved operating profit thanks to higher sales volume and a better product mix, despite continued cost pressures." Choi Go-un, an analyst at Korea Investment & Securities Co., also noted, "Although instability in raw and subsidiary material markets will likely continue in the second half due to the Middle East war, the company should offset it with the same structural improvements seen in the first half," adding, "It is time to recognize management's improvement efforts and the competitiveness of its global products."
The situation was different for Lotte Chilsung Beverage(005300). Second-quarter revenue on a consolidation basis increased 2.4% to 1.1129 trillion won, but operating profit fell 10.4% to 55.8 billion won. Profitability worsened simultaneously in the beverage and global institutional sectors. The global institutional sector's revenue rose 3.4% to 458.5 billion won, but operating profit dropped 27% to 26.1 billion won. The Pakistan subsidiary's revenue grew 20.4%, while operating profit declined 18%. Subsidiaries in the Philippines and Myanmar saw declines in both revenue and operating profit.
Park Sung-ho, an analyst at LS Securities, said, "Cost pressures in the beverage business were greater than in the alcohol business," analyzing that "prices of key sub-materials such as aluminum cans and plastic PET surged." He added, "For overseas subsidiaries that rely heavily on imported raw and subsidiary materials, the expense burden is higher than in Korea."
However, looking at the first half as a whole, both companies maintained growth. Lotte Wellfood's first-half revenue rose 7.0% to 2.1831 trillion won, and operating profit jumped 98% to 100.5 billion won. A simple sum of the first- and second-quarter overseas subsidiary results puts first-half overseas revenue at 581.7 billion won and operating profit at 41.6 billion won.
Lotte Chilsung Beverage's first-half revenue increased 3.4% to 2.0654 trillion won, and operating profit rose 18.6% to 103.6 billion won. The global institutional sector's revenue grew 6.7% to 836.7 billion won, and operating profit increased 11% to 40.5 billion won. Although the two companies differ in how they classify overseas businesses, a simple sum shows first-half operating profit from the overseas/global institutional sectors at 82.1 billion won, accounting for about 40% of the two companies' total operating profit of 204.1 billion won.
◇ Overseas remains the variable in the second half as well… Wellfood focuses on expansion, Chilsung on restoring profitability
Overseas operations are expected to remain the key variable dividing the two companies' results in the second half. Lotte Wellfood is further expanding production capacity and distribution networks, centered on India. The Pune ice cream plant's average utilization in the second quarter was around 61%, suggesting room for further gains. The effect of adding a fourth production line for Choco Pie in India, which began operation in June, is also expected to be fully reflected in results from the second half. In Kazakhstan, the company will expand distribution of Lotte-branded products and new chocolate items, and in the United States and Europe, it plans to widen local distribution networks for products such as Pepero.
For Lotte Chilsung Beverage, restoring profitability in overseas operations is more critical than expanding scale. The company expects can and PET prices in the second half to come down from their second-quarter peaks. In Korea, the effect of beverage price hikes implemented at the end of June is also expected to be reflected from the second half. The company is maintaining its existing targets of 4.1 trillion won in revenue and 200 billion won in operating profit on a consolidation basis this year. Joo Young-hoon, an analyst at NH Investment & Securities, said, "In the second-quarter results, the deterioration in overseas business profitability was a disappointment and the main reason for missing consensus," adding, "Whether overseas subsidiaries can restore profitability in the second half will be key."