China Mengniu Dairy Company Limited (2319) Earnings Call Transcript & Summary

Dear investors, good morning. Welcome to our meeting. Welcome to our results announcement this morning. This meeting will be conducted in mandarin. In the meantime, we have English -- first of all, please allow me to introduce the management team. We have Lu Minfang, Chief Executive Officer; Meng Fanjie, Vice President and Executive Director; Mr. Zhang Ping, Chief Financial Officer; Gao Fei, Senior Vice President; Wen Yongping, Vice President; Chris Kwok, Financial Controller and Company Secretary; Li Pengcheng, Vice President; we have Yan Zhiyuan, Chief Executive Officer; Wen Jieping, CFO. I'm going to talk to you about the agenda. First of all, we have Mr. Lu Minfang to talk us about the 2020 performance. And then we have Mr. Meng Fanjie. Mr. -- we have Gao Fei, Mr. Yan Zhiyuan and Zhang Ping, the CFO. Next, I will pass you to Lu for the presentation for first half results of 2020.

Okay. Thank you. Investors, friends, good morning. It has been a long time that we have not been able to meet each other, basically. Thank you very much for joining our 2020 interim results presentation. Today, I think the arrangement is a bit different. Please turn to Page 1 of our PPT. In the first half -- well, actually, this year, there is the pandemic. So we would like to do a brief review. So looking back into first half 2020, the pandemic has brought about huge pressure to us while consumers have been dealt a heavy blow. After the outbreak of the pandemic, at the first instance, we set up to enhance the work leading group. And we arranged for all units in the world to anti-infection work and we actively slowed our materials, improving loss and as the protective period to protect employee safety. So among our 40-odd thousand employees, there is no [indiscernible], there is no employee who had been laid off or experienced pay cuts because of the pandemic. Most production bases continued the operation. So we are an enterprise well trusted by Chinese consumers. So during the pandemic, we actively took up our social responsibility, and we donated materials and cash in the amount of CNY 740 million. And in Wuhan, we also donated some supplies. And together with a number of organizations, we started rescue material transfer works. And in Wuhan, we completed the transport of CNY 40-odd million materials for our products. And within 2 weeks, all those supplies were sent to the frontline and saved pandemic personnel. So we are proud of what we have done because, as you know, at the end of January and early February, the pandemic was still very severe. So we did not only donate materials worth CNY 740 million, actually, during the period, our employees and our working partners, personally sent the material to the medical people within 2 weeks. So this shows some strong execution capability. We are very proud. Besides, what we are proud of is that we protected the whole industrial chain. As you know, during that period, basically, every day, the surplus stocks amounted to 9,000 odd tons, and this is huge pressure. And under this pressure, we did not reject the exceptions of any amount, and we cooperated with our working partners, we helped the upstream industrial chain to write out the difficulties. Because of the pandemic, the channel inventory was not digested and most channels were affected. In February, we spent extra money to clear inventory. And we actively developed e-commerce and also home delivery business, so that the whole supply chain has resumed normal. Because of all these measures, you can see that at the end of April, for our room temperature liquid milk channel inventory is resumed to normal. And there is double-digit growth for Mengniu, our comparable business. And all channels resumed or recovered almost completely. And then in May and June, the growth was even stronger. At the same time because we discharged our social responsibility, the brand reputation and word-of-mouth was greatly enhanced during the pandemic. So I would like to take this opportunity to thank everybody who has helped us line our businesses during the pandemic, especially the frontline medical workers. And we need to thank our 40-odd thousand employees because they stick to their position. So thank you, all working partners, so that we can continue to supply our products to end consumers, so that people can benefit from food nutrition. Now next page, please. If we look back, there are a few important points. Our decision-making was fast and our execution was very fast during the pandemic, because of our decision, then in Q2, our business recovery had strong foundation. For our room temperature premium brands our growth exceeded the peers. Market share continues to rise. So it was enhanced by 1.1 percentage points to 28.2%. Our market share was enhanced. We are #1 in the industry. At the same time, our pure milk also grew 25%. And in Q2, our net profit margin increased significantly. In Q1, premium milk was affected. Then in the future, if you look at Deluxe growth, it is very strong in May. Deluxe DreamCap was further upgraded, so it was upgraded from 3.6 grams of dairy protein to 3.8 grams, comparing with 2019. In 2019, Deluxe growth was 25%. In Q2 this year, the growth exceeded 30%. So we have to thank, or actually, this is a display of brand competitiveness. And then if you look at our low temperature products, during the pandemic, the [ LC37 Yoyi C ] was launched, and this is in the low-temperature category. The third point is that for our fresh milk business, it grew almost 100% year-on-year. And then if we do not take into consideration Wuhan, which was greatly affected by the pandemic, the growth was even stronger. Market share continued to rise. And then in June, our market share was already #2 in the industry. For fresh milk in terms of channels, there is strong growth, both online and off-line. Our online growth in Tmall, JD and so on, we achieved growth more than 600%. And then there are a number of home delivery companies and businesses, on which we achieved strong growth. Our supply chain freshness continued to rise, [ T plus 0 ] milk products was enhanced by 10 percentage points to 80%. Next page. Our ice cream business, this year in the first half, we wanted to adjust our brand positioning and to improve product structure so that selling channel can be reinforced. Our operating profit margin increased by 5.7 percentage points. And then for cheese products, there is growth. Retail was very outstanding. Both revenue and net profit achieved 3-digit growth. And then for our future strategy, actually, in the first quarter, we made adjustments to product structure and brand positioning of formula milk. In Q2, we recovered in terms of profit margin, and then for Yashili business, there was 25% growth. And during the period, we have strong growth in Mengniu as a whole. So we were brave in fighting the pandemic, and we have raised change. We lead the industry in recovery. We continued our high-quality development so that there is a high-quality of life for consumers. So for the first half, I think our team is very, very confident in what we have done. Now I would like to talk about our financial highlights. Yesterday, after the announcement, I believe you have read the data already. So looking at the first half, operations and financial performance. Our financial data included Junlebao that was the -- disposed off in November last year. Last year, in December, there was also the acquisition of Bellamy, the data are included. So in first half, revenue was CNY 37.53 billion, including Junlebao, down 5.8% year-on-year. And net profit attributable to parent company, CNY 1.21 billion, down 41.7% year-on-year. In order to enable you to have better understanding of our business growth, let's turn to the next page. So here, you can see financial highlights for comparable business. In the first half, we achieved revenue of CNY 36.89 billion, so up 9.4% year-on-year, and sales volumes increased 8.2% (sic) [ 8.6%, ] structure and price positive contribution, 1.2%. This growth rate is better than our expectations in March. At the same time, it is expected that for comparable business in the first half, revenue slightly declined or remained flat. GP margin in the first half was down 30 basis points to 38.9%. So in the first quarter, we cleared inventory and at the same time, there was impact from price structure on price discounts. Our operating profit margin down 2.5 percentage points because in Q1, we spent extra money to handle -- accept channel inventory. So that's a one-off impact. But then the pandemic [ passed ] during the Chinese New Year, which was the busy period, so we hoped that we would be able to clear inventory, and we have completed the work and the outcome was much better than our expectations. In first half, comparable business, net profit was CNY 1.158 billion, down 42.1% until the attributable net profit was CNY 1.211 billion, down 41.7%. Because in early June, when we gave earnings warning, but at that time, attributable profit was down 45% to 60%. And in June, our revenue grew very strongly in Q2. Profit margin also improved on a year-on-year basis. And also the main joint venture companies, for example, Modern Dairy and so on, was better than expectations. And so we have procured some antivirus materials. And all the -- well, the amount of money, the impact arising from that exceeded 1.4 billion. So basically, our performance was better than our expectation at the beginning of the year. In order to enable you to have better understanding of the impact of the pandemic, let's take a look here. In Q1, despite the pandemic, we're still able to achieve a [ flat ] business from -- in Q2, there was 19.2% growth. So this is growth in sales revenue. And if you look at operating profit margin, in Q1, there was a slight pause, however, in Q2, operating profit margin reached 6.7% comparing with the same period of last year. That was a growth of 2.7 percentage points. So you can see that our Q2 business recovery was quite satisfactory. Just now I said that all the impact during Q1 was one-off. I'm not going to repeat the point. But for Q2, our business growth and our selling expenses ratio is such that our cost control is good and all the costs and expenses are on a reasonable level. So that's why there is significant improvement in our operating profit margin. If you take a look at our various categories, that is liquid milk, ice cream, milk formula and cheese. You can see that liquid milk grew strongly. Ice cream in the first half, there was some adjustment. So growth in revenue only 2% for mix formula but this includes salary. In 2019, there was no Junlebao. So here, you can see the overall scale. So there is an increase by 29.8% later on. There would be a presentation on Yashili business as well for other products and cheese, up 41%. Retail cheese was very strong. For pasturing cheese, there was some impact. So this is a revenue breakdown by segment. Then if you take a look at our cash flow and CapEx. Here, you can see that we have set out Q1 and Q2 without Q2. Net cash from operating activities grew strongly in Q2. There is the 300 -- CNY 3.8 billion operating cash in the first half. There is strong growth in operating cash flow. And this includes all the one-off impact. So overall speaking, our operating cash flow enjoyed good growth, 32% growth. This is very good. This shows that our operation is very healthy. And then CapEx, during the pandemic, apart from the building of the Wuhan [indiscernible] fund, which was affected in all other places, our fixed asset investment and capacity expansion was almost in line with our original plan for 2020. So CapEx was CNY 1.68 billion. This is in the quarter with our plan at the beginning of 2020. Next page, SG&A expenses. So here, you can see Q1 and Q2 data. In Q2, S&D expenses resumed normal. So it was down 1.9 percentage point. And if you include the one-off investment, the S&D ratio was 30.6%. G&A expenses, it continues to come down by 30 percentage points to 3.8%. During the pandemic, we minimized business trip or traveling expenses. So here you can see a very healthy level. Next page, I'm going to talk to you about the operational efficiency impact. And as you can see this is all very good. In terms of our turnover, inventory has increased. This is because in beginning of the year, we have accumulated imported powder as well as for the Chinese New Year. And so far, for all the milk powder, we have digested most of that to a healthy level. In addition, for our inventory level by end of June, it has returned to a normal level. So I have simply walked you through the financial situation. And now I think it's still very important for you to understand about our 2020 strategic priorities. When the pandemic started during our discussion, we have outperformed our strategy even if the pandemic has an impact on our strategy, but we also hope that we are going to stick to our 2020 priorities and for the 2020 to 2025 period. So we have 6 important aspects. The first one is the upgrading of the brand proposition. And second is to continue to build a RTM revolution; and number three, strengthen raw milk sourcing; number four, cost saving; and number five, our digital ability; and number six, what we are going to do after the acquisition. So now I'm going to walk you through them one by one and as well as our achievements. Number one, in terms of our donation, our donation, as well as the retail that we are carrying with, you can see that has actually helped with our sales. And during our procurement, you can see because of our excellent performance in donation, our brand has enjoyed a very good reputation. In the meantime, we have our Chinese cartoonized marketing, and it has actually caused a lot of discussion online and, again, rejuvenated the brand among the young people. In terms of our revolution or reform in terms of channels, we continue to push forward our work in this area, for example, we continue to improve the coverage of the liquid milk. In terms of empowering the distributors, we continue to promote smart network systems that refine channel management. Another highlight is that we -- our previous model of Penetration into Towns and Villages, we have already seen great results in Hunan and Anhui provinces. We already have increased 150,000 point of sales within the first half of 2020. And again, this is a new model that has assisted us securing with the online help, and this is a model that we wish to promote to the whole of the nation. Similarly, in the new retail, here, we have also obtained good results for e-commerce. You can see, we have seen good results, number 1 sales, on 618 Shopping Festival, O2O home delivery during the pandemic. We have created over 100,000 retail groups, during the pandemic, to drive community sales. So all these new channels have also helped to promote our sales in the first half of the year. Number 3. Actually, during the pandemic, in terms of the decisions that we have made and to continue to expand. You can see that at that time, there was a lot of pressure, but now looking back, these were all the right decisions in terms of we continue to exert more control of the source of milk. And now looking at this, in both China and overseas in terms of the coverage of milk sourcing as well as in Mongolia, in Hubei, Shandong, in Heilongjiang province, we have already successfully established new milk farms and to -- continue to exert our influence in this area. And you know that modern farming, we have already become the largest shareholder of Shengmu, and they are also the largest organic milk, raw milk sourcing. In addition, we continue to improve our business efficiency. So these farms, for the first half of this year, they have seen great operations, and they have also increased the raw milk supply to Mengniu. Moving on, I'd like to talk about the organic milk demand. It is very strong at the moment. So after exercising our shares' right and becoming the largest shareholder, we will continue to push forward the development of organic milk. In the meantime, in terms of our full chain cost savings, this is also a very important part for this year, from design-to-value initiative. We will be driven by consumers and putting consumers in the center, so that our products are closer to the consumers, and our products can reflect the true value. So from this perspective, whether it is from the product perspective or from the consumer's perspective, this is why we can see that our gross margin, despite during the pandemic we have invested so much, our gross margin is still at a very high level and Q2 gross margin is even higher than that of Q1. Again, this has solidified an even healthier development foundation. Number 5. In terms of improving our digital capability. We have a dedicated digitalized team. We have six areas to push forward to the overall group development. And this year, we will be focusing on the digitalized and precise advertisement, omnichannel consumer-centric operations. Number three, one pack, one code. We have established a bridge to interact with our consumers. And also, we will be using the big data and establish a big data platform, going forward, for all our communication with the consumers and in terms of improving our efficiency, it will become very smooth. Number 6, last page. This is about the integration and synergy. Since last December, Bellamy's joined Mengniu family. We have carried out overall integration of Bellamy's, and as a very important part of the international business of Mengniu, Bellamy's continue to strive for pursuing an extreme organic and -- natural or organic brand. We continue to have our Chinese management team to be strengthened and to build a solid foundation for the domestic business. In May, we have launched the first super extreme A2 organic milk. And in June, we have launched the super high-end organic goat milk. Right now, we have also launched a Chinese version of baby rice in March this year, and it is being sold very well. In the meantime, Bellamy's has already received the Chinese formula registration approval. And the first Chinese version of the baby formula milk will be launched efficiently in the second half of August in China. So again, this has completed our omnichannel deployment of both online and offline. So we believe that with this new product in the second half of this year, we will see even better expansion. In addition, I would also like to mention about the termination of Lion Dairy acquisition. And this I believe that you have heard quite a lot about the reports. Acquiring LDD, we hoped to build a very complete and competitive pacific and Southeast Asia business. And it was in line with our strategy. Even if in the end, we did not succeed, we feel very regretful about this. However, in terms of the supply chain, basically, it's because LDD has their own local business and in Australia, in terms of the supply chain arrangements, we have not stopped our work in those areas. So even if -- it is with regret that we tell you this, but since we are trying to go overseas. And of course, we will see the big wins and waves coming our way. So we were prepared. But this year, I can tell you that we still have very stable milk supply chain in Australia and New Zealand, and we will continue on our path of determination for internationalization. And we will work very hard on the existing business that we have and utilize the domestic and overseas 2 markets, 2 resources and to help the China and world milk to go on to a better development role. And last but not least, I would like to mention this. You can see that Mengniu was selected into the Hang Seng Corporate Sustainability Index in Hang Seng ESG 50 index. So far, we are the first Chinese milk company that has been selected, and this is well reflecting the past 3 years of our work in environment, social and economy. And we are working and been following -- we are following the United Nations 12 sustainable goals in Mengniu. We have specifically allocated a committee for this. In addition, in Mengniu, we have a dedicated execution team to make sure that they follow-up on the development in this regard. And I believe that in the future, we would be able to implement all of this in terms of our national level green factories and build 2 smart factories to embrace digital transformation. And I strongly believe that if we can roll out our strategy plan, it will help us with our long-term sustainable growth. Great. This is my simple introduction for the first half of this year. I now will pass the floor to the Yashili team to talk to us about the Yashili performance. And last but not least, I would like to thank you all for your support. Our management team are full of confidence. We believe that the pandemic's impact on our business is limited. In addition, for the future outlook we're very positive. Thank you.

Thank you, Mr. Lu. [ Ping Zhang ] you can start. [Statements in English on this transcript were spoken by an interpreter present on the live call.]