CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

[Interpreted] Ladies and gentlemen, I am Uan Hong, Head of IR team and Finance Strategies division at CJ Cheiljedang. I would like to apologize for the delay due to some delay in our disclosure. Let us now begin the Q3 earnings release for CJ Cheiljedang. Let me remind you that for our foreign investors, Korean to English simultaneous interpretation will be provided for today's presentation. Before we begin, let me introduce CJ members present here today. First, we have [ Mr. Shin Jong Han ], Head of Finance Strategy Division; [ Mr. Ransom Juren ], Head of Finance, Planning Department; [ Ms. Ya Yangmei ], Head of Treasury Team; [ Mr. Kim Zango ], Head of Korea Business Management and Food Business Unit and; [ Mr. Thuze Bam ], Head of Global Business Management and Food Business Unit; [ Mr. Kuang Zhu ], Head of Digital Marketing and Food Business Unit; [ Mr. Ogi Hun ], Head of Biobusiness Management; and [ Mr. Huang Yonghua ], Manager of Business Planning at Beiden Care. Today, we'll have [ Mr. Shin Jong Han ], the Head of Finance Strategy Division, who will be walking you through the results and reviews for Q3, followed by presentations on key issues and outlook for each business by respective presenters and we'll have the Q&A session at the end.

[Interpreted] Ladies and gentlemen, I am [ Shin Jong Han ], Head of Finance Strategy division at CJ Cheiljedang. We'll now begin the Q3 release. I would like to first go over the performance. Excluding CJ Logistics for sales, with positive sales process but in global, we have seen increase of 8.8% year-on-year to KRW 3.7484 trillion for sales is operating profits with improvements in profit structure of Food and stronger performance of flagship products of Bio and high hog prices for F&C. We have recorded KRW 311.7 billion, which is a growth of 72.2%. As for our net profit, with decline in net interest cost, we have seen an increase of [ 594.9% ] at about [ KRW 164 billion ]. I've mentioned that it's grown about 8.8%. It's about KRW 320 billion (sic) [KRW 302 billion]. And if we break it down to each business unit: For Food, it's KRW 164.5 billion; Bio KRW 52.2 billion; and KRW 85.6 billion for F&C. For operating profits, it's about KRW 130.7 billion. And if we break it down to each business: for Food, it's KRW 44.3 billion; Bio, KRW 26.8 billion; and KRW 59.6 billion for Feed and Care. So all in all, we have had operating profits of KRW 311.7 billion. And now I'd like to walk you through the results, including CJ logistics. For sales, we have seen growth to KRW 6.3425 trillion. As for operating profit, we have seen growth of 47.5% and as for net profits, together with growth in operating profits, we have seen improvement in nonoperating expenses of KRW 105 billion. So compared to the same period last year, we have seen increase of 1,006.4% (sic) [1,007.7%] which has recorded at about KRW 189.2 billion. And let us look at the results for each business unit. Let's first look at Food business unit. For sales compared to the same period last year, we have seen increase of 7% at about KRW 2.2 trillion. And as for the continued improvements in sales we have achieved operating profits of about KRW 175 billion, and we will divide it into Korea and Global. For Korea, for gifted performance, it was similar to last year. And thanks to increasing demand for eating in and high growth in HMR, we have recorded KRW 1.3687 trillion, which is 4% increase. So for Korea business, we have seen an increase of 6% to about KRW 897.8 billion. And for food ingredients, it's about KRW 470 billion, which is similar to last year. As for processed food, we have seen high growth in HMR, so it has maximized our sales, and we have seen high growth in Spam, Mandu, Kimchi, and we have seen double-digit growth in many of these core products. As for HMR, thanks to the high growth in [indiscernible] in porridge and soup and stew, we have seen increase of 27% to about KRW 144.8 billion. And for global business, there has been some decline in B2B sales. There has been increase in sales at B2C, and there has been high growth in our Japan subsidiary. So we have seen growth of 13% year-on-year to KRW 1.204 trillion (sic) [KRW 1.0204 trillion]. So to break it down in global, other than Schwan's, our growth has been about 45% compared to the same period last year. And for U.S., it's 2%. And for Schwan's, it's 1% and about 10% for others. So for the U.S. as a whole, it's about 2% growth. For Schwan's, there has been positive growth in B2C sales, but there has been some setback in B2B sales. And there has been the impact of the marketing, low-margin SKUs, but thanks to the increase in sales for B2C, we have been able to achieve KRW 664.6 billion. For China, we have seen high growth in Mandu, pickled products and paste. So we have seen growth of 32%. For Vietnam, we have also seen very high growth in Wrap food and Kimchi. As for Japan, [ Michu ] we have seen sales of about [ KRW 38 billion ]. So for Japan as a whole, we recorded about KRW 66.7 billion. And let us look at the operating profits. As I've mentioned before, we have been continuing our profit-led growth, and we have seen solidified profit structure for global business. So we have seen increase of 34% year-on-year to KRW 175.8 billion. So we have normalized our prices, and we've had some positive impact from the high season in the third quarter. And as for global, we have been able to streamline trade and promotion costs, and we have been able to expand the market presence of our flagship products like mandu and pickled vegetables. And for Schwan's with expanded mix of high-margin products and by streamlining cost, we have been able to achieve OP margin of 7.5% and OP of KRW 50.1 billion. If you look at the table, in the third quarter of 2019, it was about KRW 2.2 trillion and 6.5%. But for this quarter, we have been able to achieve OP margin of 8.1%. And if you take into account Schwan's PPA, it's about 7.4%. So for sales and operating profit alike, we have seen very positive improvements. And let us now go on to Bio business units. Right, so first on Bio for sales, there has been gradual increase in demand for animal feed additives, and we have seen expanded market presence of flagship products. So we have achieved KRW 771.3 billion. And as for F&C, there has been continued high hog prices and increase in demand for animal feed with expanded sales of livestock and animal feed. So we have been able to achieve sales of 56.7 -- operating profit of KRW 56.7 billion and operating more profit margin of 10%. As for Bio, if we break it down with recovery in hog population, there has been stronger market presence in Tryptophan and Valine. And we have some expanded sales of Arginine, which has increased so we have seen increase of 7% year-on-year. And as for food additives, there has been gradual recovery in restaurant demand. And there has been expanded sales of nucleic acid, there has been -- there have been some issues with -- I mean there's a decline in ASP. So there has been slight decline in sales and as well operating profits. We have seen increased in ASP for feed additives. And with our cost competitiveness, we have achieved operating profit of KRW 79.2 billion (sic) [KRW 78.2 billion]. What I would like to highlight today is that we have high-margin products like Tryptophan, nucleic acid, valine and arginine. And in the third quarter of 2019, it was 29%, and we have seen increase to 30%. So it's showing gradual increase. And as for feed and care, with prolonged hog prices and increasing demand for animal feed in China, we have achieved KRW 588 billion, which is 17% year-on-year. For feed, there has been decline in demand for chicken. Rate increase in hog rates in China and increasing prices, we have seen growth in sales. As for livestock, with high continuously high hog prices, we have seen expanded sales, and we have been able to achieve growth. As for operating profit, there has been a stronger value chain buildup for livestock farmings in Vietnam, and there has been some restructuring in Korea, but with high -- continuously high hog prices, we have been able to achieve extremely high operating profit. And as for CJ Logistics, as for the third quarter sales, thanks to high growth in e-commerce, there has been continuous growth in parcel business, and there has been ease of lockdown. So with increase in deferred demand, sales has grown 6% to about KRW 2.7 trillion. As for operating profits, with the same reasons, it has grown 4% from the same period last year. I will now look into the major indicators as for SG&A to sales ratio. Excluding CJ Logistics, it grew about 1.4 percentage points to 22.6%. As for SG&A, what I have been continuously highlighting is that it is now maintained at about 22%. In Vietnam, there has been some increase in SG&A, but even so we have been maintaining it at around 22%. And as for the ratio, including CJ Logistics that has grown -- that has risen 0.6 percentage points to 15.6%. And as for operating -- nonoperating expenses, excluding CJ Logistics, we have seen decline of KRW 74.4 billion. So there has been improvement of KRW 74.4 billion, and there have been improvement across all different indicators. With a decline in net borrowings, net interest expenses has also declined. And as for foreign exchange-related gains, we have an increase of about KRW 31.5 billion (sic) [KRW 32.5 billion]. And as for commodity derivatives, compared to the same period last year, it has increased KRW 14 billion. As for other nonoperating expenses, it's pretty much the same as last year. As for non-operating expenses, including CJ Logistics, as I've mentioned earlier, for CJ, it has improved [indiscernible] by KRW 74.4 billion. And as for CJ Logistics, there has been improvement of KRW 30.6 billion. So all in all, non-operating expenses, including CJ Logistics, has been improved by KRW 105 billion. So I've given you a brief overview of the results. So we'll now move on to the issue and outlook presentations by each business unit. We would first like to invite the presenter for Food business unit issues an outlook by [ Mr. Kim Jang Hun ], Head of Korea Business Management and Food Business unit.

[Interpreted] Hello everyone. I am [ Kim Jang Hun ], and I'd like to share with you the key issues and outlook for Food business unit. As for Korean HMR products after launching [ crop plan ] that we have seen tenfold growth in 5 years, and we believe that there would be further expansion in items and categories across different occasions and premiumization. And we believe that e-commerce is likely to continuously drive growth. As you can see on the images in the slide, since 2015, due to efficiency of products that have been rolled out since 2015. So we rolled out [indiscernible] in 2015. And we've also [indiscernible] side-dish. And in 2017, we launched gourmet pizza. And in 2018, we launched PBIG Ports and in last year, we launched Bibigo porridge, and last year we launched Bibigo grilled fish. And in 2020, we have launched "The Bibigo," which is our healthy portfolio. So in 2015, when the sales was about KRW 32.2 billion. But as we move into 2020, you can see that we have seen continuous growth. And for this year, last year, it was KRW 449.5 billion, and we have an increase of about KRW 100 billion. So we can see that growth track. And for hetbhan and kimchi, if we add hetbhan and kimchi in here as well, we believe that we can achieve above KRW 1.2 trillion in sales. If you can see the direction for expanding HMR, as mentioned earlier, we would be expanding the HMR categories and occasions continuously and we would also continuously increase frequency of how often our products are consumed. And we would continuously premiumize our products that we would like to strategically expand our e-commerce channel to continuously pursue growth. So we would like to nurture HMR products that is very fit for e-commerce. For example, for seafood, so the examples would be grilled or braised fish. And there, the share of online for these products in the third quarter was about 37%. So you can see that these products have accounted for high share in our e-commerce. And by leveraging our [ DTC ] database, we would like to offer customized HMR products and test new products and brands. In order to continuously expand HMR in this direction, we would need strength in technology at engineering and R&D and raising our brand equity, and we would also focus on catching trends so that we can reach markets early on. So based on these competencies, we will continuously pursue growth in our HMR products. So that's it for -- and then we'll now move on to Global Business units perform -- a global business Foods business in global arena.

[Interpreted] I am [ JV ] in charge of Global Business management at Food business unit. So I'd like to share with you the current presence of K food. So in order to become a global #1 company, we would like to pursue a balanced portfolio between K-Food and local products, so we are now driving global [ edge ] growth. Let's look at the sales for -- the sales of key K-Food items. For mandu, we have been -- we have built [indiscernible] base for mandu in major countries like the U.S., China, Vietnam and Japan -- in Vietnam, and it has grown about 48%. And the percentage of approval in the total mix has been above 50%. And if you look at the year-to-date performance [indiscernible] COVID-19, we had -- despite many challenges posed by COVID-19, we have been able to expand penetration in mainstream. So compared to last year, we have seen growth of 41%. So in order to make the next leap in K-Food, we would be focusing on the next mandu item. Such as Hetbhan/Kimchi/Seaweed and sauce, and they have been continuously growing. And in 2019, they have achieved sales of about KRW 60 billion. And as for year-to-date in 2020, it has grown 48%. So you can see that the case has grown continuously in the global arena as well. As for the U.S., after acquiring Schwan's, other the mandu and K-Food, we have seen -- we have been focusing on conventional processed food in the U.S. like pizza. So we would like to further solidify our leadership in these products. Along the total sales in the U.S. Schwan's accounts for 85% of total sales. And as for mandu and fried rice and as for others, we would like to further localize our K-Food, and we would like to leverage Schwan's retail competitors in the U.S. So from the fourth quarter, we have integrated frozen grocery for Schwan's and CJ Foods. And as for China, we have been focusing on traditional Chinese products [indiscernible] . So we have been focusing on Pao caio and traditional paste. We have been focusing on a balanced portfolio of local food and K-Food. And especially for the Singles' day in November, we have been strengthening our e-commerce activities. And you can see that we have substantial growth in mandu and HMR. So there's a Singles' day in November, we are expecting very good results during the day. And as for Japan, there's a lot of interest in beauty, so that has led to growth in our [indiscernible] sales. We have achieved #1 in market share in the diluted fruits in the grocery. And we have also been rolling out K-ready meals in our major retailers in Japan. As for Vietnam, we have been solidifying our base there. So including wrap food and fish balls and spring rolls, together with local portfolio, we have also been looking into growth of K-Food locally as well. So that's it for my presentation for a global business in -- I mean, Food business in Global. I will now move on to Bio issues. We'll have [ Mr. Ogi Hun ] present on the key issues and outlook for Bio business.

[Interpreted] Hello, everyone. I'm [ Ogi Hun ] in charge of business management at Bio. If you look at the amino acid. I'd like to talk about the 3 issues for Bio business. Let's look at the amino acid demand for 2021. For 2021, there are about 2 positive factors. First is that the number, and that means they are [ sizing ] their hog raising businesses. And after the ASF in 2019, China has been accelerating monetization of hog raising businesses. There has been some effect because of COVID-19, but as COVID-19 subsides, [ monetization ] is likely to accelerate. And with -- there'll be a sharp increase in soybean yield prices. And because of climate issues in Argentina, we believe that there will be decline in supply. So these are the 2 positive factors in terms of supply. And there has been a sharp increase in price of corn in China. It has actually risen more than 50% in recent months. The CJ Bio business unit has 6 plants overseas. I mean, we use -- we have diverse use of different supplies, but there are some competitors using just China's corn. So I say, we believe that we are at a favorable position than our competitors. And as for specialty feed additives, so for, of course, lysine and amino, are the replacements for essential amino acids. So if we use grains like soybean meals, there are those substances that animals can absorb, and that's going to lead to environmental pollution. So for amino acid and lysine, I mean, these were the [ defaults ] that were mostly used, but there has been increase in Tryptophan and Valine and there's also increasing use of [indiscernible] as well as other different types of proteins. So with our technical competencies, we -- I believe that this is a result of our efforts to actively [ nurture ] demand. And there's also a lot of highlights on arginine and other high value-added specialty amino acids and their demand is also increasing. So CJ is the only company that has the full lineup of these products. So without too much investment, we would be able to do interoperable manufacturing to make sure that we can maximize the efficiency of our manufacturing. And in 2021, we would like to have more than 5 products with performance of more than KRW 10 billion. And as for entering into a new business for our existing business-like amino acid, there has been a lot of volatility depending on how the external environment turns out. But there has been accelerated efforts in R&D to develop new specialty amino acids and we have the flexibility of interoperable manufacturing. So we have been able to continuously stabilize our profit structure. There has been some [indiscernible] in demand because of COVID-19, there has been other negative factors because of COVID-19, but even so, we are expecting very good numbers. And as you know, like lysine and Methionine, their operating profit is actually less than 10% of total operating profit mix. So for our existing business, we would like to make sure that we can ensure fundamental competitiveness that will help us remain resilient amidst changes in the external environment. And we would like to identify new business areas. And one of that is PHA. So we have a biodegradable plastic. We have acquired a company that would pass that technology. And within the 5 years, we have improved the competitiveness, so that it is now possible to commercialize. In Indonesia, we are now setting up the full commercialization line in [ poster ] online. There are 4 types of biodegradable grades. We have industrial household foil and marine degradable. So simply put, the industrial grade is within a specific condition that degradation takes place. So over 85 degrees, we [indiscernible] microorganisms. And it takes a week to be degraded as for PHA, within the marine environment, over 90% it will be biodegraded in the natural conditions. So it has the most optimal conditions to be degraded. The PHA market size and the potential, if you look into that, the overall plastic market is KRW 45 trillion in size. And of this, the disposal plastic market accounts for 2/3, which means that PHA targeted market is about KRW 150 trillion. The current biodegradable market size is at KRW 1 trillion, but the Chinese government most recently has banned the use of disposal plastic like spoon. So for specific purposes, Chinese government is now pushing for the use of biodegradable materials. So we believe that the market size will be much exceeding that KRW 1 trillion size. And in the future, we believe there will be further drives for rapid growth. Based on fermentation technology, predicting CJ within the world, there's only 3: Connect Japan, I know of the U.S. and CJCJ. Of those 3, the most fit PHA developer and producer is CJCJ. So we are currently looking into this research to make it more optimal. As for commercialization, we will be able to line up and strengthen the lineup of PHA commercialization. Thank you. Finally, we would like to look into the Q4 outlook by each business unit. For domestic food, HMR due to the bullish market size of B2C however, despite that, because of burden of the Lunar New Year gift set, we believe that this will be offset. As for promotion fees in Q4, the efficiency has somewhat improved. So compared to the previous year, the overall promotion costs will go down. For global in the U.S. due to the resurgence of COVID-19, we believe that B2C product sales will go up. And by integrating the frozen food networking with Schwan's, we will be able to do a full-fledged sales of frozen food, resulting in sales growth. As for China, [indiscernible] and JD and also online channel sales will now go to be full fledge, and we believe that the performance will be increased accordingly. Moving on, the Bio outlook. Feed additives with the recovery of the hog population in China, this means that the feed additive price will be going up as well as the sales volume. As for food additives, with the COVID-19 situation being subsided in China, dining out trend will be recovered, which means that that [ particularly ] will go up. Feed & Care for feed, the profit structure being improved to the previous year, we believe that there won't be much fluctuation. As for livestock, the poultry price might improve in Indonesia. However, in Vietnam, with the recovery in the hog population. However, the weakness in the pork sales price, we believe that the profit will go down. Overall, Q4 2020 outlook, the sales growth rate is forecasted to be at mid-singles and OP rates to be 6%. That is it for the presentation prepared today. And next, we will move on to the Q&A session.

[Interpreted] Q&A session for Korean questions, it will be translated simultaneously. For English questions, it will be translated consecutively. Now we will begin the Q&A session. [Operator Instructions] First question is from Morgan Stanley, Ms. Kim Hyeeun.

[Interpreted] I have a question regarding Schwan's. You said that B2C is okay, but B2B is not doing well. So sales growth is not going to be that high. And also, you mentioned about the marketing items. So the sales trends, what strategies that you're setting? Could you give us more details on that, please? Further or more, on issue and outlook regarding HMR, could you give a bit more -- thank you for a lot of details. However, the HMR category, what is the operating profit there? If you look at them from the bigger perspective, could I have that information?

[Interpreted] In Q -- the Q3 Schwan's sales to answer that question, over 30% of sales is accounted by food service, which is B2B channels. So there was a setback in that area in terms of sales. Last year, the food service area. The biggest sales was taken by the school catering service, the K-12, but the sales to cover that up was not easy. So in the U.S., when the school year starts in September, from July, we would start the supplies. However, the K-12 sales dropped significantly, meaning that the food service B2B channel sales was not recovered. However, the trend of eating at home is still going strong since COVID-19. And the new products for pizza will still being launched so we are seeing a lot of growth in sales in terms of pizza. So overall, for B2C, the sales is about 25% -- over 25% in growth. However, in B2B, the sales setback is not able to offset that completely. So for Schwan's, overall, there is no sales growth. However, if you look at the profit and margin, B2C, our margin rate is pretty high in B2C. In particular, the pizza sales growth, if you look at the depreciation or the sales price, we were able to do a lot in that. So I think in profit wise, that resulted in a positive way. Next question was on HMR OP rate. First, I would like to ask your understanding in that the operational rate for operating profit rate HMR. We did not disclose it in detail. So we'll give you the rough picture. HMR OP rates right now 2020, due to the increase in eating-at-home trend. For 3 quarters, consecutively, it has been growing at 20%, and the margin rate has also gone up. The average margin rate for processed food is not on par as yet. However, it is on growth.

[Interpreted] Next question is from Manulife -- for Manulife and [ Yeo ].

I guess, my question is that given that the U.S. and in particular, Schwan's, is effectively flat. And adjusting for the fact that there are fluctuations in the business between B2B and B2C, it has effectively been a year and again, acknowledging the impact of COVID. Looking at forward growth, you mentioned that we would be cross-selling CJ products onto Schwan's existing shelf space. Hopefully, we'll be able to convince retailers to give us such shelf space. My question is, can you just give us a little bit more detail about where we are in the process? Where is the low-hanging fruit now that we've integrated some of our cold chain. When can we expect some real numbers to flow through on that front?