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

Investors, analysts, media friends, good morning. China Mengniu Dairy Company Limited 2025 Interim Results Announcement will begin now. On behalf of China Mengniu, I would like to welcome all of you for coming. And I would like to also thank you for your long-term interest, support and investment into Mengniu. So please take a look at the disclaimer on the screen. Now let me introduce to you our management team. They are Mr. Gao Fei, Chief Executive Officer and Executive Director; Mr. Zhang Ping, Chief Financial Officer; Mr. Shen Xianwen, Chief Financial Officer and Executive Director, incoming; Mr. Chen Yiyi, Vice President; Mr. Li Pengcheng, Vice President; Mr. Chris Kwok, Company Secretary. In today's meeting, Mr. Gao Fei will do a review of the 2025 interim results and business performance and also outlook followed by a Q&A session. So we expect to conclude this event at 10:50. Mr. Gao Fei, please.

Investors, analysts and media friends, good morning. First of all, on behalf of Mengniu's management and all employees, I would like to express our sincere gratitude for taking time out of your busy schedules to attend China Mengniu's 2025 Interim Results Presentation. We would also like to extend a warm welcome to Mr. Shen Xinwen as he is a new member of Mengniu's management team. Last night, we already released the company's financial report for the first half of the year. Currently, the industry continues to face significant supply-demand imbalances compounded by evolving consumer demands and shifting retail channels. These factors collectively create substantial pressure on the sector. So in today's presentation, I don't want to focus too much on pressure and problems. Instead, I'd like to engage in a deeper discussion with you all, how we view the industry under these pressures, how we embrace change and how we see Mengniu's future development and change. So first of all, I would like to give you a report on the financial data for the first half of the year. The company achieved total revenue of RMB 41.57 billion in the first half, a year-on-year decrease of 6.9%. Both sales volume and average selling price saw a low single-digit decline as raw milk price remained lower year-on-year during the period. Gross profit margin increased by 1.5 percentage points to 41.7%. We confronted market shifts head on, focused on lean management and further enhanced operational efficiency and core profitability. Operating profit margin increased by 1.5 percentage point year-on-year to 8.5%. Operating profit grew 13.4% year-on-year to RMB 3.54 billion, with profit margin improving across all business segments, including Liquid Milk, Ice Cream, Milk Formula and Cheese. Net profit attributable to shareholders reached RMB 2.05 billion, a 16.4% year-on-year decrease. This was primarily due to Modern Dairy recording a loss of RMB 910 million after significant biological asset impairment charges in the first half with Mengniu accordingly recognizing a loss of RMB 540 million from its associate company investment. This investment loss increased by RMB 400 million compared to the same period last year. Excluding the impact of this change, net profit attributable to shareholders remained largely unchanged from the same period last year. Facing changes in consumers' products and retail environments, every category is innovating and adapting to actively embrace new trends. However, our core Liquid Milk business, particularly room temperature milk, still faces significant growth pressure and a full recovery will take time. Meanwhile, efforts to diversify our product portfolio and optimize category structure are beginning to show results. So subsegments, including Fresh Milk, Ice Cream, Cheese and Infant Milk Formula all achieved double-digit growth. Regarding expenses, through refined management of sales expenses and continuous efforts to enhance expenditure efficiency, the ratio of sales and distribution expenses decreased 0.5 percentage point year-on-year to 27.9% Administrative expenses remained stable compared to the previous year. While focusing on quality improvement and efficiency gains, we increased investments in scientific research, innovation and digitalization. These represent not only critical strategic investments, but also build momentum for long-term development. In terms of operational efficiency, all key metrics remained at healthy levels. Inventory turnover days decreased by 4.3 days, primarily due to year-on-year reduction in both finished goods and bulk powder inventories. Operating cash flow for the first half of the year reached HKD 2.8 billion, a 46% year-on-year increase. This growth primarily resulted from core net profit expansion compared to the same period last year, excluding impact of noncash items such as increased losses from our livestock joint venture and asset disposal gains recorded in the first half of last year. CapEx totaled HKD 1 billion. With current production capacity adequately aligned, we have strengthened CapEx control to continuously enhance free cash flow generation capabilities. The sustained improvement in free cash flow has also laid the foundation for enhancing shareholder returns. In June, we completed the cash dividend distribution for fiscal year 2024. In late August last year, we announced a 1-year share repurchase program, during which we repurchased approximately HKD 500 million worth of shares, representing 0.7% of the average market cap during the repurchase period. Through the combination of cash dividend and share repurchase, the overall dividend yield exceeded 4%. Last night, we also announced a new share repurchase program aiming to continuously create better long-term value and returns for shareholders through the dividend plus repurchase approach. Next, business review. Facing the new landscape and challenges in industry development, we maintain -- we actually, in August last year, we proposed our strategy of One Core Two Wings, and we have to maintain strategic resolve in this approach or strategy, and we should strengthen the core to solidify our foundation and expand the wings to foster innovative growth momentum. Regarding strengthening the core, we stabilized the foundation of our core business while accelerating development of niche categories, further optimizing our product portfolio. Looking at each business segment specifically, for room temperature business, we faced challenges in the first half of the year due to supply-demand imbalances and channel fragmentation. We proactively embraced market shifts by focusing on product innovation and upgrading our RTM distribution channels. Amid the K-shaped consumption trends, we continue to lead consumers to drink good milk. So Milk Deluxe remains committed to crafting premium milk through an end-to-end supply chain approach. Marking Milk Deluxe's 20th anniversary this year, we further deepened our value moat by leveraging the scarcity of our desert organic milk supply chain. We launched the premium flagship product, desert -- that is the Shajin Tohoi Desert Gold organic milk, continuously meeting consumers' pursuit of better high-quality options. Of course, consumers also seek ultimate value for money. We have streamlined our product value chain, launching more pure milk products this year that offer both quality and affordability, better aligning with the needs at the base of the mass consumption pyramid. At the same time, by focusing on category innovation, and matching nutritional needs across different demographics, we're accelerating the launch of precision nutrition and functional new products, enabling more consumers to Drink More and Drink Right. Facing diverse channel development, we must not only maintain our established RTM channel strength, but also actively embrace high potential channels to expand omnichannel capabilities. Since the beginning of the year, we have strengthened our online distributors and offline dealers, accelerated expansion into lower-tier markets and achieved breakthroughs in weaker regional markets. At the same time, we deepened partnerships with emerging growth channels like membership warehouse stores, bulk snack retailers and on-demand retail. We are accelerating the development of customized products tailored to each channel's attributes. Several channel-specific new products have already been launched on platforms, including JD.com, TMall, Pinduoduo, Pangdonglai, Aldi, Costco and Yunmei. Then for tube business, we have achieved notable results across 3 key focus areas: nutrition, taste and functionality. At the beginning of the year, our collaboration with the Movie NeZha 2 successfully attracted new customers and broke into new markets, driving sales of our large fruit-granule yogurt to record highs. The premium brand, YO!FINE DIARY actively expanded into family consumption scenarios, continuously broadening growth potential, focusing on the functional segment, the immunity bottle of Champion achieved strong sales performance through the Sam's Club channel. The new product [indiscernible] co-created with Sam's Club became an instant hit upon launch and generated significant organic traffic on [ flavored ] milk. In August this year, our Wuhan low-temperature factory or chilled business factory earned certification from Forbes for a smarter, greener and more flexible production, becoming the world's largest and most efficient single-site chilled yogurt facility. To date, Mengniu has established world-class lighthouse factory in 37 national level green factories. And then Fresh Milk business. In the first half of the year, we achieved over 20% growth, significantly outperforming the industry. Shiny Meadow maintained robust sales growth and brand influence. Building on core products, it expanded coverage among zero lactose and precision nutrition consumers through lactose-free dual protein milk and HMO children's care nutrition milk. So for channels, Fresh Milk continues to lead in both online and offline premium channels, holding top market shares in membership stores, on-demand retail and e-commerce platforms. Partnerships with leading coffee and tea brands like Starbucks and [indiscernible] have driven breakthrough sales. This year, for Shiny Meadow, well, more new products are launched in the Hong Kong and Macau markets. So outside, just now, you should have seen the new products for Hong Kong and overseas market. So we expand into over 1,000 supermarkets and convenience stores to achieve strong market performance. Then for Ice Cream business, revenue and profits grew in tandem. We launched more innovative value-added products to meet consumers' diverse needs with several new offerings becoming best sellers this year, driving continuous brand and customer expansion. This summer, our Deluxe brand officially entered the Hong Kong and Macau markets, becoming the first premium ice cream brand from Mainland China to obtain a Hong Kong license. Currently, Deluxe has entered mainstream supermarket chains in Hong Kong and Macau, covering over 200 key retail outlets. For the Milk Formula business, we have seen very good growth for both the revenue and profit. Reborn continued to strengthen its patented affinity formula R&D capabilities, launching the industry's first infant formula featuring DHA. And through the NeZha 2 IP collaboration and the Million Babies Worry-Free Nurturing initiative, the brand further enhanced the brand equity and achieved a robust growth. And for the brand, Bellamy, for first half of the year, the growth reached -- of revenue reached to more than 20%. We are highly focused on the high-end product line, including the Bellamy Platinum Organic A2. We also expanded expansion in Southeast Asia and market performance was especially strong in Vietnam market. And for the Cheese product, it also shows very good growth momentum for both revenue and profit. We continue to strengthen synergy with the Milkground and also fully empower both the supply chain and also R&D. We also focus a lot on both 2B and 2C and for Milkground. continue to create cheese brand for all. We also further enrich the scenarios of use for the casual, leisure and households tables and catering industry, et cetera. In terms of expanding the two wings, we continue to inject new develop momentum for Mengniu for H1 this year, we continue to do research and development. And we have made breakthrough including various of key segments, including the professional dairy and raw materials and the senior market and sports nutrition, et cetera. We also see very strong growth of our sports nutrition brand, including M-ACTION. And we -- our influence in the marathon runners and other sports audiences continue to strengthen. And our in-house developed HMO product is very well received by the market, and we have launched into the market HMO milk powder and also children's milk and the fresh milk. And this year, we also accelerated our progress in the deep processing business. Right now, products, including lactoferrin, D90, demineralised whey powder are already in the prelaunch stage. We also expand our expansion overseas. For the brand Aice, we further grow our market in Southeast Asia region and also for the expanding to other new emerging markets. And right now, we have built the business structure for Aice in Africa and Latin America, a key step in our globalization strategy. And we also continue to adhere to our green strategy. Green is the background color for the high growth development of Mengniu. We have the dual carbon initiative and also other strategic pillars, including the green packaging and the green operation, green supply chain, et cetera. We would like to leverage these pillars to build an absolutely leading position when it comes to ESG in this industry and also convert these advantages into tangible commercial value and so that we can become highly competitive for our channel customers and to be customers. The last part is the outlook. So I would like to go back to the fundamentals for the industry. This round of cycle for the dairy industry is lasting longer and more challenging than we expected. So in multiple occasions, I have mentioned that for the dairy industry in China, there are three pain points, which is the imbalance between supply and demand, the lack of diversity of the categories and also the lack of tolerance and resilience for the whole industry. And these pain points are further exacerbated given weak consumption, and this is shared challenges for the whole industry. And it is a challenge. It is also a very important transformation opportunity for us. For the mature markets like Europe and America, the cheese and butter and yogurt, these solid products consumption is around 50%. So we see a very highly diversified product structure for those markets. And some high value-added raw materials such as lactoferrin is very common in overseas market. And the foreign companies are at an absolute advantage when it comes to the technologies and industry accumulation for these high value-added raw materials. But if you look at the China's dairy industry in the year 2024, the total import of dairy products was 2.7 and 7 million tonnes, and that was around 17 million tonnes of raw dairy materials and out of which the import volume of butter, condensed milk and lactoprotein continues to increase. This shows that when it comes to this high value-added raw materials, we are still highly dependent on imports. And this is something we need to make further breakthroughs when we transform the whole industry. And if we look at the whole pattern of development for the global food and dairy industries, we need to further focus on R&D, accelerating product innovation and category upgrade to further expand user application scenarios. And we think there's huge potential overall for China's dairy industry. Milk is the natural food that is closest to perfect. And we need to start from the essence of milk and also the fundamental consumer demands. And we need to treat the nutrition value and the functional value of milk as the core value of this whole category. At the end of March, I proposed the idea of helping consumers to drink milk, drink the good milk and drink right milk. And we would like to have all these diversified dairy products to become a indispensable food for high-quality life. And I would like to introduce to you what kind of work we have done at Mengniu and how we embrace diversified demands and also the diversified channel needs. For H1 this year, we focus more on building the value chain and launching more basic dairy products that are great value for the consumers so that more consumers can afford to have milk. And for the lactose intolerant audiences, we also launched the soft milk and zero lactose products so that more consumers can drink milk. And going forward, we'll continue to improve our supply chain efficiency and cover more lower-tier markets to service more consumers. In addition to the product end, we also collaborate with industry associations, institutions, the media to further popularize the healthy drink of milk. And we would like to change dairy products into indispensable food for consumers. Mengniu is one of the first to the practitioner to help consumers drink good milk. 20 years ago, we launched the industry's very first high-end product, Deluxe, which is -- which was redefining the whole category. And since the birth in 2005, Deluxe continues to make progress. We had the classic one, now the slim version. And then in 2021, we created the desert organic milk, leveraging the full industry chain approach. And this is a great breakthrough when it comes to the protein nutrition. And we continue to expand into regions and areas that are purer and with more rare resources. And in 2009, we started the project in Ulan Buh. It took us 16 years to cultivate the land of oasis in the desert. We created lakes and grass and we've rolled the grass and we pasteurize cows on this oasis in the desert. We further improved the industry chain source for Deluxe. The organic matters for the soil increased from 0.1% to 2% in this area. This year marks the 20th anniversary for Deluxe and leveraging our 16 years of experience in this industry, we launched the top premium product, which was called Shajin Tohoi, this product, the source is originated from the core area where there are 5 legs in this Ulan Buh desert area. And also it delivers a record level of protein, which is 4.3 gram. And this shows that we have made huge breakthroughs when it comes to nutrition. We also successfully managed to combine both natural resources together with industry wisdom. This product is unique and irreplicable. And we would like to provide superior experiences, both functionally and emotionally to the consumers through this product. In the past 2 years, Deluxe invited a few thousands of consumers for a visit to Ulan Buh and for a visit to the grassland and pasture and the factories of Deluxe. And this piece of land we have been cultivating for more than a decade is finally seen by the industry. And here, I would like to do a bit of marketing. I would like to invite all the investors, media friends to pay a visit to Ulan Buh, which is our organic milk source in the desert. It is indeed a very rare and precious piece of land. There is mountains and lakes, very great landscape, and it can very well demonstrate the huge efforts we put behind this good product. And based on the current categories, we also would like to further accelerate our R&D of new products and to create new application scenarios and meet consumers' diversified needs. And we would like the consumers to be able to drink milk and also eat milk. For drink the right milk, this is the future for this whole industry. The Healthy China strategy is now promoting a new era, which looks at a more precise and tailor-made product. And Mengniu is committed to R&D and also to further take advantage through precise operation. And based on the insight we got from consumers and for first half of the year, we launched the products, including prebiotic and vitamin milks. These are the functional milk with precise nutrition, and they can very well satisfy the specific nutrition needs of different consumer segments. As people are becoming more health conscious, we also see strong need for functional nutrition. Therefore, we incubated and launched the brand M-ACTION, which is a sports nutrition brand, and it is very well received by the sports audiences, because we have a very diversified product mix, including the liquid protein, energy gel and the protein bar. We also have the elderly nutrition brand, Yourui, which are aiming at the elderly market. The product can help to build muscles and improve bone health for the elderly. And Mengniu also in-house developed HMOs, which help to address the industry pain point, and we're now already at the commercialization stage. So for both the children's milk and liquid milk and fresh milk, we are now providing precise nutrition for the whole industry. In addition, we are also committed to our investment in deep processing business we have accelerated our research and launch of high value-added raw materials, including demineralized whey powder, cassava flour and lactoferrin, et cetera, so that we will become less dependent on imports. And through R&D, through product innovation, we would like to further upgrade the whole industry because we would like Mengniu products to really satisfy consumers' needs from the baby to the elderly segment. Mengniu will face the cycle challenges of the whole industry, embracing the market challenge changes and also addressing the three pain points of the whole industry. We'll continue to make sure consumers can drink milk, drink good milk and drink the right milk. And through continuous brand building efforts, R&D and digital transformation channel upgrading efforts, we would like to further strengthen our core and expand the two wings. The management team is very confident and is fully committed. And we believe that we're able to create history and the current challenges will help us to build our resilience and to write the new chapter for the whole industry. Nourishing the world of excellence is our vision, and we would like to reshape the whole value of the industry, and we would like to be a leader to a healthy future, and we would like to create better products to serve our consumers' needs. And we also would like to empower the whole industry chain with our sustainable development, and we would like to bring high returns for our investors through robust growth. That's all I have. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]