Samyang Foods Q3 Operating Profit Jumps 49.9% to a Record on Buldak Overseas Sales

Samyang Foods, the South Korean company behind Buldak spicy chicken noodles, earned more operating profit in one quarter than ever before. In a regulatory filing on November 6, it reported preliminary consolidated operating profit of 196.2 billion won for the July to September quarter, up 49.9% from a year earlier. Revenue rose 25.3% to 791.8 billion won, so profit grew almost twice as fast as sales. Net profit, however, fell 18.9%. Here is what drove the record, what the margin tells us, and why the bottom line moved the other way.

Who is Samyang Foods?

Samyang Foods was founded in 1961 and makes instant noodles, sauces and other packaged foods. Its Buldak line of extra spicy fried noodles became a global hit, and overseas demand has turned a domestic ramen maker into a company that now earns most of its revenue abroad.

The third quarter numbers

According to the filing, revenue was 791.8 billion won, up from 632.0 billion won a year earlier. Operating profit rose to 196.2 billion won from 130.9 billion won. Compared with the second quarter, revenue grew 2.8% and operating profit grew 11.3%. For the first nine months of the year, revenue reached 2.28 trillion won and operating profit 549.5 billion won, up 32.8% and 42.7%. These are preliminary figures that have not yet been reviewed by the external auditor.

By our own calculation, the company needs another 723.4 billion won of revenue in the fourth quarter to pass 3 trillion won for the full year. That is less than it sold in the third quarter alone, but the actual fourth quarter figure will only be known when it is reported.

How much is left from every 1,000 won of sales?

Operating margin is the share of revenue that remains as operating profit after the costs of making and selling products. Dividing 196.2 billion won by 791.8 billion won gives a margin of about 24.8%. In plain terms, Samyang kept about 248 won of operating profit for every 1,000 won of noodles and sauces it sold. A year earlier the same calculation gives about 20.7%, or roughly 207 won per 1,000 won. That gain of about 41 won per 1,000 won is why profit grew so much faster than revenue.

The company said its operating margin has stayed in the 20% range for seven straight quarters. It credited wider overseas distribution and better utilization of domestic plants such as its Miryang factory. When a factory runs closer to full capacity, fixed costs are spread over more products, which usually lowers the cost of each unit.

Operating profit measures what a company earns from its core business. It excludes interest, currency gains and losses, and taxes.

Overseas sales drove the growth

Overseas sales rose 29.4% to 660.8 billion won, a quarterly record and more than 83% of total revenue, according to reports citing the company. Domestic sales grew a more modest 7.9% to 131.1 billion won. By subsidiary, U.S. sales climbed 36.6% to 212.5 billion won, helped by major retail chains and sales into Mexico, while the China unit grew 13.2% to 208.9 billion won as it expanded into snack channels.

Reports citing the company said cumulative Buldak brand sales passed 10 billion units in the second quarter. Such a high overseas share is the engine of growth, but it also means currency moves can have a bigger effect on reported results.

Why net profit fell

Net profit dropped 18.9% to 89.2 billion won, and fell 35.1% from the second quarter. Pre-tax profit also slipped 7.7% to 127.4 billion won. The company said a stronger Korean won created accounting losses when it converted foreign currency assets back into won.

A foreign currency valuation loss happens when a company holds dollars or other foreign money. If the won gets stronger, those holdings are worth fewer won on paper, and the difference is booked as a loss even though nothing was sold.

This is why operating profit and net profit can move in opposite directions. Operating profit shows how the noodle business is doing. The gap between operating profit and net profit shows how much currency and other non-operating items are adding or taking away.

What to watch next

Two things are worth tracking. First, whether overseas sales keep growing in the fourth quarter so that the operating margin stays in the 20% range. Second, whether a stronger won keeps widening the gap between operating profit and net profit. Samyang Foods also said in a filing that it will hold an investor relations event in the United States on November 9.

The bottom line

Samyang Foods turned Buldak's overseas popularity into a record quarter, keeping about 248 won of operating profit from every 1,000 won of sales. Net profit fell on currency valuation losses, so readers should look at the two profit lines separately. The fourth quarter report will show whether the record margin can hold.

Sources: Samyang Foods