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

Investors, ladies and gentlemen, good morning. Welcome to the 2020 Annual Results Presentation of China Mengniu and Yashili. This meeting will be conducted in Mandarin. We have arranged English simultaneous interpretation. I'm Willow in -- from Investor Relations department. Let me introduce to you our management. From Mengniu, President and Executive Director, Mr. Lu Minfang; CFO, Mr. Zhang Ping; Senior Vice President, Mr. Gao Fei; Vice President, Mr. Wen Yongping; President, Yan [ Shi ]; Deputy Director, Li Pengcheng; Company Secretary, Mr. Kwok Wai Cheong. From Yashili, we have Executive Director and CEO, Mr. Yan Zhiyuan; CFO, Mr. Chen Limin. Now let me go through the agenda for today. First, Mr. Lu from Mengniu will go through the 2020 full year results and a development. After that, Mr. Yan from Yashili will go through the 2020 results. After that, there will be a Q&A session. [Operator Instructions] Now may I invite Mengniu management to present Mengniu 2020 results.

Yes. Thank you, Willow. Investors, friends, good morning. Thank you very much for joining us online as the Mengniu and Yashili annual results presentation. Because of COVID-19, once again, we can only meet each other online and present our 2020 results. Okay. I guess you already have our materials in your hand. So let us directly turn to financial overview. If you look at revenue of the listed company, in 2020 and 2019, revenue was down 3.8% because we sold Junlebao, and there was some impact from there. Our GP margin was at a stable level. In fact, there is an increase by 0.1 percentage point, operating profit margin of 37.6%. So it is down from last year because of the pandemic -- sorry, it should be 4.6%. And earnings per share is also down. We are able to better reflect our performance. So let's take a look at our financial results on a comparable basis. In 2020, we successfully overcame the challenge of the pandemic. Last year, starting from Q1, our revenue growth and also profit improvement are very healthy. Our revenue came from both product structure and sales volume. So on a comparable basis, despite the pandemic, revenue was up 10.6%. This is a very good performance. Our gross margin was rather stable. So there is 0.1 percentage point. This is because of price increase of raw milk. However, if we only look at second half, comparing with the same period of last year, our GP margin expanded by 20 basis points. Raw milk cost challenge can be digested. This is mainly because of our multiple product structure with UHT, fresh milk and chilled products, and then our discount rate was down for white milk products. So you can see that our profit margin is still expanding healthily. Operating profit margin was down. As I said just now, this is mainly because of the one-off expenses caused by the pandemic. Without the pandemic, if we exclude these one-off expenses or if we reverse these one-off expenses, our operating profit margin expanded. So later on, I will elaborate more. Concerning other finance expenses, well, there is an improvement. In the future, in order to better reflect our business trends after the pandemic, I would like to share with you our performance in the first half and second half. So you can see that in the first half, our business growth was shown in the interim report. In the second half, business growth was 11.8%. In the second half, results were quite good. So for the full year, 10.6%. If you look at our operating profit margin as such is now, there's an increase. In the second half of 2020 operating margin comparing with the same period last year expanded 0.6%, so 60 basis points at 5.4%. So this is better than our expectations. We have taken into consideration the impact of milk price increase and also our overall product structure and also the lower discount rate. Under the pandemic, we're able to achieve these results. This is not easy. In the past 4 years, if you look at our development, well, it had not been fundamentally affected by the pandemic. After the pandemic, our business recovery and the recovery of our profitability have returned to a normal level. So I need to thank all 40,000 employees of Mengniu for the very -- for the hard work and for the great determination in facing up to the challenge and all our supply chain marketing partners. Thank you for helping us achieve the results and our target. Now I would like to talk about a breakdown of our sales revenue. So if you have our materials in your hands, please turn to Page 8. So here, you can see our sales revenue, liquid milk, up 10.9%. So this is in line with our overall revenue growth. This is mainly because of strong growth of UHT milk and fresh milk. And then for our fresh milk brand and Deluxe, they grew 20%, Fruit Milk Drink up 12%. So this is for the whole year even including the pandemic period. For pure yogurt, there is positive growth. And then for fresh milk, triple-digit growth. For chilled yogurt, there is a decline but our decline is lower than that of the industry. The industry experienced a double-digit decline. Now after the pandemic, there is a growth in dairy product demand. At the same time, we kept on building our brand and enhancing our products, expanding our channels and so on. For our ice cream products, we have changed the 2019 decline trend. In 2020, we achieved small growth. For formula milk revenue, it's up 30.3%, including Bellamy and Yashili's results. And then our cheese also grew well. So we have achieved more than 50% positive growth. And our scale reached [ 1 billion ]. Okay. Now let me turn to the operational level, so our operating performance. Despite the pandemic, our operating activities and positive cash flow achieved positive growth. So it is CNY 5.35 billion. So there is an increase comparing with last year. And then concerning our capacity investment, it is reflected in our CapEx in the second half. So that was fast business recovery. For the sake of the coming 5 years' development, our capacity plan in 2020 still follows our strategic plan. It was implemented. So you can see that our CapEx was CNY 4.4 billion. So this shows our newly built factories and production lines. So the pandemic did not change our coming 3-year or 5-year strategic plan. On the contrary, during the pandemic, we implemented our strategic plan. This page, our selling and administrative expenses. So let's take a look at the first half and second half. Of course, for the pandemic, we had bigger one-off selling and marketing expenses, but in the second half, it resumed normal. So it is actually flat. For selling and administrative -- for administrative expenses, it came down to 4.1% from 4.3%. Of course, there's a reduction in business trip expenses because of the pandemic. For our staff income, it is not lower than 2019. In fact, it is slightly higher than 2019. So this shows our business performance. Next page. So our operating efficiency. As in the past, there is a different degree of improvement if you look at receivables and payables. Inventory turnover slightly increased because during CNY 2020, we need to prepare our product as a result of inventory growth. So I have gone through our financial numbers. I believe we have a very good view of that. Now I'd like to spend some time talking about how we can achieve financial results in 2020. And I'd like to talk about our company's strategy as well. First of all, I think in 2020, most of our business was surrounding [indiscernible] pandemic and focusing on the recovery after pandemic and we've also taken measures to [ establish ] our new retail channel, strengthening our client base and our new brand in new retail and other digital platform, including the penetration to towns and the villages have been developing there as well. What is more important is that in 2020, we have accelerated the digital project of the group and the digital transformation model. Our R&D has been developing in every BU, especially room temperature products, including Niu [Foreign Language] and other digital applications. These measures have boosted our expense in the off-line branches and the integration of off-line and online business and also the efficiency of delivery. So we have been very efficient despite the pandemic. And now I will talk about our business by segment. Our room temperature business has double-digit growth for 5 consecutive years, continuing to lead the industry. In terms of channel transformation, we have shipped a lot with higher market share and premium brands, including new Deluxe has recorded very good growth and we have 20% growth in white milk and other drinks, including the Fruit Milk Drink and as reported a 12% growth over the year. Our product innovation of the new Deluxe premium yogurt and other new products as well as our new Fruit Milk Drink product, they have been doing very well in 2020. Then let's now look at the other highlights. On the next page, you have our 2 segments of fresh milk and cheese business. We have achieved 100% growth in net revenue of the consecutive 2 years with our market share increasing to 11.2%, increasing by 4.1 percentage points. We were ranked #2 in the industry in June. 81% of our fresh milk can be produced on the day, and they can be put on the shelf of the supermarket on the same day. And we have consolidated our premium brand position in the market. We have achieved over 150% growth. And cheese also has made breakthrough with 3-digit growth in revenue and net profit, and the results are better than our expectations, especially in retail channels, we have [indiscernible]. Despite the pandemic, our To B business has been going on very well. And we are pretty positive about the outlook of cheese market. We have invested in new brand. It's a strategic investment. And I believe the synergy in the future will help us achieve the leading position in the cheese market in China. And part of the 2 businesses, the other businesses are also improving, especially in ice cream and chilled products. The coronavirus pandemic has impacted our chilled product but we continue to breakthrough in innovative ways with new products. For example, zero sugar, low-sugar products and we focused on key brands and key products. Ice cream, especially in more [ general ] channel and new retail distribution channel, we have seen a better improvement in terms of sales and operating profit. So we expect that in 2021, there will be a clear upgrade of the product structure of ice cream business. And then let's look at milk powder business. I'm sure you're paying close attention to it. Yashili started to switch its strategic position and product mix in 2020. In 2020, the growth and net profit are better than expected. I'm sure [indiscernible] will share with it. And the overall year growth is not optimistic. But in the second half of the year, we have recorded 20% in net revenue as we focus on regional market and regional baby care distribution channel, and we built a very good foundation. We acquired the Bellamy's business in December 2019, and we have been launching good products like super premium A2 milk formula and organic A2 goat milk formula. So we have established the full metrics of premium infant formulas. And in off-line channels, we have pretty good achievement. The Australia cross-border e-commerce channel was affected by the pandemic, but the domestic is highlight and with very good growth in organic products. So overall, the business of Bellamy's has met our expectation. The online cross-border business was affected but other distribution channels are better than expected. We believe that in 2021, Bellamy's will continue to deliver very good performance. I think I have pretty covered all the business units. And besides that, I think international investors are closely watching our steps in sustainability. In the 3 years down the road, we will work on environment, society and economy with 12 topics and 27 initiatives so we can implement measures to honor our promise and responsibilities to the environment and society. We have published a Mengniu Dairy Quality Assurance White paper. And we have conducted pilots for measuring factory carbon emissions. We also established a wealth -- welfare system in all the dairy cow ranches in China, and we have made clear our target and path for emission reduction. In sustainability, we were recognized by the capital market. This is shown by the fact that we were selected a constituent stock of the Hang Seng Corporate Sustainability Index and Hang Seng ESG 50 Index in August 2020. Now I'll spend some time talking about our business outlook for 2021. First of all, of the past 21 years, we've made huge progress. An important reason is that we rebuilt our corporate culture. In the end of 2020, we published the new corporate culture document, and this is a summary of our experience over the past 21 years. It's also to upgrade our corporate culture for the future. This is why we published our new corporate culture and strategies. So we will boost future development for the new culture. Our new mission is focused on nutrition and health, deliver a drop of happiness for every moment and every day to more people. The vision is to thrive as the centennial health and nutritional food enterprise that is consumer-centric and innovative. And our core values, our Mengniu spirit, so we are born to excel. We constantly strive for self-improvement so we can work on our value chain and supply chain, and every partner can realize the value. And in the end, we are going to [indiscernible]. These core values cannot be put as a label on any other company as they can be only put on us. So we'll work together with 30,000 employees in 9 months as we produce this new corporate values and cultures, and this is a result of teamwork throughout the group. So I believe these core cultures and values and cultures are really rooted in everyone's mind. Now let me talk about our mission, which is to create a new Mengniu by 2025. In business level, we will continue to create -- we created a group of 80 billion in the [indiscernible] years. And in 5 years, we're going to create more miracle. We're going to create even better business. You can see room temperature, chilled development businesses and milk, we have very clear plan, and we have a very clear strategic plan for every business unit. And we are, in simple words, in business, we are going to focus on dairy industry, achieve high-quality growth with steady profitability improvement because we believe there is more room for development in China's dairy market and better development opportunities. But [indiscernible] to realize our strategic objectives, we will continue to build up 5 core capabilities. The first is digitalized marketing, so all digital supply chain, marketing, consumer operation, et cetera. So Mengniu's digitalization will be brought to a new level. Second, R&D innovation. We focus on all life cycle. The core R&D systems, and we will focus on the deliverables of innovative projects. And we have a quite good project to make sure that the raw milk source is good. We rely on Modern Dairy, Shengmu and Fuyuan, the 3 dairy companies. So we can work with big and small branches to achieve win-win cooperation. In terms of acquisition integration, we will enhance our post-acquisition management to maximize the output. These strategic goals must rely on our strong organizational capability. We will strengthen the talent-building business with our strategy and we continue to improve the incentive system and revitalize our organization.

Even after that, you have doubled your profit and your revenue and you have secured your business, but what is the new thing about your future development?

I think we are new but because we are a leading dairy company in China, and we're going to boost the dairy industry in the 14 -- 5-year time period.

Looking forward, by 2025, what will Mengniu look like?

The first on financial indicators, I hope we can be a brand that is cherished, loved by the consumers. It's going to the consumers' first choice. So operation, innovation, brand in all aspects, we'll have good development. So we will be the #1. First, choice of consumers. Second, we will be a digitalized Mengniu. An intelligent and digitalized Mengniu will bring us closer to the consumers at creating new business models. So we can break through -- we can break the borders of this industry and we can a nutrition brand with intelligence. Third, we're going to be an internationalized Mengniu. We will be international leading in brand product resources and status and talent as well as governance. We're not building business every -- in each country. But with global supply chain, we will be a truly international company. And then we can participate in international governance, be part of the sustainable global supply chain, becoming a leading company in dairy industry in the world. So our capability, governance and quality, all these aspects, we need to be at an international level. Fourth, a Mengniu with a strong cultural chain. So our mission is to have every drop of nutrition and benefit every life. So we will give [ full plate ] to our spirit and compete with ourselves, and we will honor the 4 core values. So our corporate culture will be the sustainable entities for future company development. And last but not least, we're going to be confident with a strong sense of responsibility, talking about improved production, responsible supply chain and welfare for human beings, revitalizing the villages and township development of China, and we will safeguard the common health of mankind and us. So I believe Mengniu, 5 years down the road, will be different from what it is frankly. So not only in financial indicators but also the core values. In the end, we'd like to give our outlook for 2021. I know you're pretty concerned about the latest trends in dairy industry in China. So just to sum it, currently, there has been some imbalance between demand and supply in raw milk in China. So that will drive up the raw milk price. Second, we know that the consumption has been vibrant to the pandemic with faster growth of dairy industry. We also see that the market has great potential in lower-tier cities. And in the end, I would say marketing and brand communication model will change due to the changing lifestyle, more digitalized and more demanding. So that's -- in 2020, we will continue to enhance our digitalized initiative and improving our digital capability. We have a few core strategic goals. Our long-term strategic goal will not change, and we will continue to boost our core strength. First, we have multiways of sourcing, which will offer strong impetus for our future development. I believe you remember that we invested in more than dairy in 2017, and we made it very clear that we would develop premium milk, fresh milk and these high-quality sources from Shengmu, Fuyuan and Modern Dairy. They supported our business development. Second, we will focus on mother brand and core brands of each product category and continuously upgrade brand talent. Third, we will strengthen omnichannel marketing and sales. We will speed up emerging channel development and channel penetration. As you could see, in 2020, our business penetrating to township and villages had recorded very good business. So we are building a good brand in lower-tier cities. Fourth, we will upgrade our overall R&D innovation to meet the differentiated demands of different consumer groups. So through innovation, dairy product in room temperature, drink -- fresh milk, chilled ice cream, we will have innovation in every category. And in 2021, we will continue to promote the innovation business. Last but not least, we will speed up additional transformation to build a completely close look in digitalization. We have a special task force led by myself, and we will boost digitalization in room temperature, chilled products and premium bread, et cetera. So I have gone through the presentation on our business performance. In simple words, to sum up, I think, first of all, the pandemic has not affected our business much. However, despite the pandemic, we did a better job in brand and innovation and realizing our strategic goals. So I believe we will come out from the pandemic even stronger in terms of business development and improved profitability. That's why for the year of 2021 and the 5 years down the road, we will be fully confident, and our team will be in line with these strategic goals and they will carefully implement them. So in summary, I think we feel that for employees in Mengniu, driven by the corporate culture and the mission, we'll be fully confident for our goal to realize a new Mengniu in 2025. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]