CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

I am [ Uan Song ], Head of IR team and Finance Strategy Office at CJ Cheiljedang. We'll now begin the Q1 2021 business results report for CJCJ. Let me remind you that Korean to English simultaneous interpretation will be provided for, for investors. Let me first introduce today's participants from CJ. We have Mr. [ Kang Gyong-So ], Head of Finance Strategy Office; Mr. [ Yang Shin-Jin ], Head of Finance Planning Department; Ms. [ Yo Gong-Mi ], Head of Treasury Team; Mr. [ Kim Jong-Ho ], Head of Korea Business Management at Food; Mr. [ J.B. Cho ], Head of Global Business Management at Food; Mr. [ Kim Yong-Gu ], Head of Digital Business Management Team at Food; Mr. [ Han Gyong-Go ], Head of Management Support Division at Bio; and Mr. [ Han Yung-Min ], Head of Business Planning Team at Feed & Care. So Mr. [ Kang ] will first go through the business results followed by issue and outlook reports by respective presenters. We will then move on to Q&A.

Hello, everyone. I am [ Kang Gyong-So ] from Finance Strategy Office of CJCJ. Please go to Page 5. As for the first quarter, we have seen a stronger profitability, and we've expanded sales and market leadership and with results from biosecurity. So thanks to all that, we have been able to grow by 5% in sales and 56% for operating profits. And if we move on to the next page, Slide 6. If we look at the highlights of the first quarter of 2021, this is excluding CJ Logistics. In sales, we have seen continuous growth in core products and channels in Food. And in Bio and Feed & Care, we have been able to strengthen market leadership. So we have experienced 5% growth year-on-year to KRW 3.6 trillion. And as for operating profits, with profit-driven strategy in Food and high-margin products in Bio as well as rising hog prices in F&C, we have been able to grow 56% to KRW 342.3 billion. And as for net profits, with the base effect from disposal gains from Gayang site last year, it has reduced by 52%. But if we put that aside, we have actually increased by KRW 152.8 billion. If we include CJ Logistics, we have seen growth in sales of KRW 347.2 billion and KRW 109.2 billion in operating profit. And moving on to the following slides. If you look at the performance of each business unit. Let us first begin with Food business unit. For sales, despite strong won, we have been able to grow 2% year-on-year. For Korea business, we have been able to select and focus on core products and channels. So we have seen continuous growth. And we have been -- we have demarketed underperforming products and customers, and there has been a timing difference in gift set sales. So we have seen growth of 5% to KRW 1.28 trillion. And as for global, we have seen high growth in Japan and China with expanded sales from core products by country. But in the U.S., there has been some issues with foreign exchange and COVID-19 that resulted in slow growth in B2B. So we stood at KRW 1.2 trillion. And as for operating profits, with efficient resource allocation, we have seen 52% year-on-year to KRW 176.4 billion. In Korea, we have been able to improve cost and profit structure to really strengthen our profitability base. And in global, with expanded K-food sales, we have been able to increase profitability as well. If you look at the next slide. Our operating margin is about 8.3%, excluding purchasing price allocation of Schwan's. And if we include that, it's about 7.6%. And let's look at Slide 10. If we look at the details of Korea business at Food. For Food business Korea, we have seen continuous growth in core products, namely Hetbahn, Mandu and HMR. And in terms of channels, we have focused on e-commerce and convenience stores and processed food. If we move on to the next slide for Global Food business. In the U.S., there has been some issues with B2B because of COVID-19 and strong won. Even so, we have been able to grow in B2C. So we have been able to maintain sales similar to last year's level. And for B2B, with active rollout vaccination, we have seen recovery in demand since March for B2B. And as for China, we have expanded sales of core products focused on e-commerce. And with recovery in dining-out demand, we have seen increase in B2B demand, which resulted in growth of 13% for K-food and 19% for online. And as for other regions, we have also seen much growth in Japan and other regions as well. If you can go on to the next slide. For Bio, so in line with low use -- I mean, declining use of crude protein, we have been able to raise prices by expanding use of amino acids, and we have strengthened market leadership. So we have seen an increase of 15% in sales. And as for operating profit, we have been able to achieve KRW 77 billion, which is an increase of 51% year-on-year. As for feed additives, with technical marketing, we have been able to see expanded share of high-margin products with lower use of CP, and we have been able to proactively lead ASP. And as for food additives, there has been lack of containers from Chinese competitors. So leveraging on that, we have been able to expand sales of nucleotides worldwide, and we have accelerated new market developments for TasteNrich. And as for operating profits for feed additives, we have been able to proactively lead the market with lysine and tryptophan. And based on cost competitiveness, we have been able to minimize the impact of increase in commodity prices. And as for food additives, leveraging our market leadership in nucleic acid, we have been able to expand sales worldwide. And we have also expanded sales of specialty products, including arginine and histidine. Moving on to the next page for Bio business. In graph, the operating margin is 9.9%, which is up by 2.4 percentage points from the same quarter last year. And moving on to Feed & Care. With high -- continuously high prices for livestock in Southeast Asia, with strong performance in biosecurity, we have been able to also improve productivity. So we have seen an increase in sales of 8% for sales, and we have achieved operating profits of KRW 88.9 billion, which is 69% year-on-year. As for feed, there has been a decline in demand due to ASF and COVID-19, but we have actively increased prices ahead of commodity prices increases, and we have been able to see continuous growth in aqua feed. And as for livestock, based on thorough biosecurity competency, we have minimized ASF mortality rate, and we have continuously improved productivity. So we have an increase of hog sales in Vietnam by 28%. With increase in prices for Indonesian poultry and Vietnamese costs, we have been able to see increase in sales. And as for operating profits, we have been able to continuously improve productivity. And as for Indonesia, we have also improved cost structure. And there has been recovery in poultry prices, which resulted in improvement of operating profits. Moving on to the next page. We have seen -- I mean operating profit margin stood at 15.1%, which is an increase of 5.4 percentage points from the year before. Next is on Slide 16 for CJ Logistics. Thanks to the increase in the parcel business, the business has gone up by 7 percentage year-on-year to record KRW 2.6 trillion. As for operation profit, the cost has gone up, that goes beyond the price increase of parcel. And unfortunately, that's gone down by 17% to achieve KRW 48.1 billion. Moving on to Slide 19. This, excluding CJ Logistics, is looking to SG&A and nonoperating profit and loss. The SG&A has gone down by 0.7 percentage points -- excuse me, gone up by 0.7 percentage points to 23.1%. And also, it's also gone up by -- for Bio, it's gone up by 0.9 percentage points. Now you can also see the advertising and promotion cost has gone up, and this is due to the brand campaigns. The total for profit and loss due to the disposal of the Gayang land plot is achieved of KRW 435.7 billion. But if you exclude that, then actually, we've seen an improvement of KRW 92.4 billion. The transaction cost was KRW 3.1 billion -- the loss, excuse me, and the foreign exchange valuation loss was minus KRW 30.7 billion. Now including CJ Logistics, the SG&A was mostly due to CJCJ, so we don't necessarily have to go into the details. Next is on issues and outlook. First, we'll start with the Global Food business expansion, which is on Slide 22.

Good afternoon. I am [ J.B. Cho ] of Global Food business. In the U.S., Bibigo brand positioning is being strengthened in the grocery channel, especially with Mandu. Bibigo Mandu's market share in grocery channel was 21.3% in Q1 '21, demonstrating a year-on-year increase of approximately 9 percentage points from 12.6%. Bibigo brand's market share in Asia snack category was 9.1% in Q1 2021, showing a year-on-year increase of 5 percentage points from 4.1%. Meanwhile, ACV for Mandu continues to grow as a synergy effect to integrating Schwan's and CJ Foods' frozen grocery channel. When we say ACV, it's more like a distribution rate. So it's peaked significantly from 35.1% prior to integration to 52.4% post-integration. By individual grocery stores, ACV jumped from 41.7% to 67.7% with retailer W. As for retailer T, distribution began after integration to record 82% ACV in March. Now in the major grocery retailers, we actually are managing the categories, and we have actually called this Asian Zones, which is a set of shelf offering collection of Asian foods. In one of the largest retailers in the U.S., K, the number of branches with Asian Zones that have jumped from just 1 in March 2020 to 26 this January, and this number is expected to reach 600 by July. Sales growth in Asian frozen food category of stores with Asian Zones stood at 69%, much higher than 17% growth rate shown by stores without the zone. Moving on to China. Mandu is showing continuous sales growth in online channels. China's year-on-year online sales growth was 19% in Q1, while for Mandu alone, it was 35%. Furthermore, we plan to launch new products in new categories such as Korean-style chicken and self-heating soups to target Generation Z and the consumer base known as smart moms. In terms of channels, we continue to strengthen our position in online platforms such as Tmall and JD while also expanding into other channels such as TikTok, which is rising in terms of popularity most recently. In Japan, we continue to strengthen the Micho brand by launching new products and expanding channels. Subsequent to achieving KRW 100 billion sales in 2020, high quarter-on-quarter growth of 28% and year-on-year growth of 91% was achieved in Q1. Especially new products are also being introduced, introducing -- including ready-to-drink products and jelly products, while expanding penetration into new channels such as convenience stores and drugstores. Furthermore, Bibigo Mandu, which has richer filling and is bigger in size, key differentiators to local products, is also displaying robust sales of 175% year-on-year growth. Next is on Bio's new growth driver on Slide 23.

Good afternoon. I am [ Han Gyong-Go ]. With health and safety, natural and ecofriendly rising as major consumption trend keywords in developed countries such as Europe and North America, we plan to expand development, production and sales of sustainable and 100% biodegradable materials derived from plants and manufactured in nature-friendly methods. First is Clean Label condiment seasoning and flavor materials. TasteNrich is 100% fermented Clean Label condiment and seasoning material launched in May 2020, made with natural ingredients such as sugarcane and containing no artificial additives. It maximizes an ingredient's original flavor and offers a balanced taste despite the low sodium content. The market size is estimated to be around KRW 1 trillion as of 2019. CJCJ's TasteNrich is garnering attention as Clean Label material, which are additive- and allergen-free and plant-based and are being spotlighted in food and consumer goods market. Sales is picking up, particularly in the alternative meat industry. Sales goal for this year is to achieve fivefold year-on-year growth. FlavorNrich, which is another new material, is being produced in non-electrolysis method. And this March, we have successfully developed world's first mass production technology. Cysteine is a functional amino acid with antioxidant, detoxification and skin regeneration effects. And it's used as a flavor material to create a meat-like flavor. With the recent rise in alternative meat and plant-based foods, we plan to target giant global flavor houses and food companies to create double-digit CAGR growth. Next is PHA and White BIO. PHA, developed by CJCJ's Bio business unit, has been certified for its biodegradability in all 4 areas, industrial, home, soil and marine, by TUV, the most prominent ecofriendly certifier in Europe. Production facilities will be completed in Indonesia by the end of 2021, and production will kick off in 2020 at 5,000-ton capacity. Moreover, to expand application, we are actively searching for collaboration opportunities with potential clients and partners. For example, CJCJ will be supplying PHA filament to Helian Polymers, a Dutch 3D printing company. And most recently, we have developed and applied PHA packaging to CJCJ Foods' tofu product. To achieve this, we have also set up collaborative relationship with chemical material and compounding companies such as SK chemicals and Woosung Chemical. Leveraging future properties and the advantage of biodegradation, we will continue to search for clients and partners to expand application cases in order to dominate a leading position in the biodegradable material market. Finally is the outlook for Q2, moving on to Slide 24. So overall, due to last year's B2C-based burden and increase in raw material and cost, profit improvement for Food business will be restricted. However, with increase in food additive sales price, Bio business is forecasted to show similar performance to the previous year. Going into specific business segments. I'll start with Food business in Korea. The B2C-based burden of last year and increase in raw material costs will be a burden. But this is to be offset with the recovery of B2B business, expansion into CVS channel and creating of high-margin core products and channels. For some items, competition is expected to become more intense, but this will be responded with efficient execution of cost, shift into digital channels and strengthening our fundamental competitiveness driven by brand and R&D. As for Global Food business, B2C-based burden is still present in the U.S. due to last year's COVID effect. Overall sales growth is expected with increase in sales price of key products such as pizza, expansions on the grocery channels and recovery of B2B channel. For China, sales growth will continue by expanding Mandu sales, leveraging our position in the online market, recovering B2B sales, including seasoning and condiments, and launching new products such as chicken. For Bio, we reflect the increase in grain and logistics costs to the feed additive sales price as demand rises with the recovery of Chinese hog markets. Profit will also rise for key items such as lysine and tryptophan as we continuously strengthen our cost competitiveness. For food additives market, high growth of TasteNrich is expected to continue as next-generation condiment material along with sales increase for specialty products like arginine and histidine and sales for nucleotide expands based on our market dominance. For Feed & Care, increasing grain cost is expected to heighten the burden for raw materials and cause gradual decline in Vietnamese hog price. However, this is to be offset with increase in feed sales price, expansion of sales volume by improving livestock productivity and active improvement of cost structure. Consequently, CJCJ's overall sales growth is forecasted to be in the mid- to high singles, with OP margin at 8% to 9%. That is all the presentation prepared for today. Next, we'll move on to Q&A session.

[Operator Instructions] So we have the first question from Mr. Park Sang-Jun of Kiwoom Securities.

Ladies and gentlemen, I am Park Sang-Jun. I have 3 questions. The first question has to do with if you look at -- there is a lot of increase in commodity prices. So there's a lot of burden from raw material prices. So in terms of defending your margin, do you have plans to raise prices for raw ingredient as well as processed foods products? And my second question is for second quarter guidance for Bio. I think it's pretty -- the profitability outlook seems very high, and that's because of increasing the price of amino acid. So I want to see how you're looking into the profitability outlook for the second quarter. Is it going to be temporary? Or is it going to continue into the third and fourth quarter? And the final question has to do with Feed & Care. When we look at the operating margin, it's very good. So we have some doubts about whether it's normalized operating margin for Feed & Care. So we would like to know if there has been any -- how -- what would be the outlook as we move forward regarding F&C's operating profit margin?

Okay. So as for your questions, as for the burdens for rising commodity prices, since the second half of last year, there has -- the commodity prices has been rising already. So we have been factoring that into our second quarter. So we have had some hedging measures. We have also conducted cost-saving measures to make sure that we can defend profit margin as much as possible. In doing so, however, we have made a lot of efforts. But for the additional burden that's going to come from additional increase, we may have to -- we are currently considering raising prices for certain products. But right now, we don't have any set plans yet. So we can't really share that with you at this -- so I can say that we are currently at -- we are currently considering potential increase in prices. And as for the second quarter performance of Bio, in the first quarter, we have achieved, up until -- we have -- I mean, I think we have been able to continue high operating margin until April. And as for the guidance for the second quarter, as presented earlier, it's going to be similar to the same period of last year or it's going to be slightly higher. So that's our outlook for the time being. As for the second half of the year, we would have to -- we are now looking -- closely looking into the pricing trend. But we can't really give you a specific number right now. But -- so it's going to be similar to the third quarter last year or it's going to be slightly less. And as for Feed & Care, regarding the question on Feed & Care, a lot of the operating margin is closely related to Vietnamese hog prices, and there has been increase in shipments of hogs that is going to decline. So consequently, operating margin is going to be similar to last year. So that's our outlook.

Next question is from Mr. Kim Jungwook of Meritz Securities.

I have 3 questions on hand. First is regarding Food. OP seems to have gone up a lot. But if you break this down into Korea and global, would that be possible? Secondly, regarding Schwan's, in Q2, the U.S. is now kind of recovering back from COVID effect. So it could be bad for B2C, but for B2B, it could be good news. But if we all put this together, how is Schwan's going to do in Q2? Finally, the third question, the Feed & Care. If the high hog price maintains, will this profit also be continued? I don't know if it's just me, but I wasn't able to hear the question for -- the first person's question. So could you repeat the answer to that question, please?

I would like to first answer your question regarding Schwan's, please. So as of March, the base effect for B2C, yes, it was there. However, as of April, the base effect is to be reflected however, but we are going to continue selling the strategic products as well as the K-food so that we can offset the B2C base effect as much as possible. And as it was mentioned in the slide, as of March, with the vaccinations now being provided of food service and the [ BE ] demands are now being rallied, so as of Q2, we expect it to recover with speed. And we think we will be able to achieve growth even based on the USD. As for the first question, the Korea Food. So raw material cost actually was reflected here. However, internally, in terms of cost saving and our purchasing efforts, we're able to facilitate the increase in profit. And also, the gift set sales during the Lunar New Year last year, that was factored in Q4. But for this year, it was fully factored into Q1. So it did show a big hike in profit. By each unit, unfortunately, we are not able to break this down by like Korea and global. However, overall for Food profit, they did evenly contribute in the profit of Food business, both Korea and global. Especially for global business, year-on-year, we did see a meaningful improvement in margin. And once again, for F&C, as for feed, we are seeing continuous increase in commodity prices. So for feed, it's going to be similar or slight decline from the same period last year. As for livestock, in Vietnam, there has been declining incidence of ASF and increasing number of livestock. So with increase in shipping, we would be seeing lower prices. But we would be focusing on biosecurity so we would be able to see a slight increase in operating margin from the same period last year.

So we have the next question from Mr. Park Sang-Jun of Kiwoom Securities.

I just have 2 additional questions. So regarding the cost burden from commodities, it's not just Korea. I'm sure there's an issue with global business as well. So including Schwan's, whether it be the U.S. as well as China and Japan, they're all going to be affected. So we want to see whether we're actually seeing the impact of increase in commodity prices translating into your business. And if that's the case, how much increase can we expect in price? I think it's going to be pretty different from what's happening in Korea. And my second question is regarding Bio as a new growth driver. You have several products in the pipeline. So you have highlighted that in your presentation. So if you look at their share in total mix, how much are you expecting? And how -- what is the outlook for next year? So please give me guidance on that.

As for the impact of commodity price increase in global business, just like Korea, we are closely monitoring this trend. Especially COVID-19 is now subsiding, so amid such changes in market environment, we're closely looking into it. And especially for China, we are seeing the risk -- ASF risk. So we are currently looking into their impact on our cost and prices. So one of the things that are highly relevant to our business in global is the price of pork. So in the U.S., we have seen an increase of about 30% versus our initial outlook. So the price has gone up by 30% for pork. So we want to go for integrated purchasing for global in terms of pork. So we want to hedge with that integrated purchasing. And second, in B2C, in the short term, we want to think about hedging this risk by raising the average sales price. So for the U.S. and China, this is how we are responding in the short term. And as for your questions regarding new growth driver in Bio, so we have the flavor ingredients and we have White BIO as our new product. So if you look at their share in total sales mix, we can't really give you the specific numbers today. But I can tell you that especially for White BIO, we have begun with 5,000-ton pilot. We have begun the pilot construction and it's going as planned. So we are at the initial stage. So we have to continue to expand sales. So that's where we are at with our new growth drivers for the time being.

Next is Ms. Kim Hyeeun from Morgan Stanley.

I have 2 questions. First is in Korea's processed food industry, HMR growth is currently at a single-digit rate. I think it's the first time we have seen this. Of course, the base is already high. However, CJCJ, how do you view your Q1 HMR growth? And what is the target for this year as well? Second question. I think it was mentioned in the slide, but B2B is not faring very well. So U.S. growth is a bit weak. However, B2C, I think it was pretty good. So how much of sales growth can you -- did you make in terms of USD, please?

Okay. To answer your first question, HMR category, typically, during the holiday seasons, the demand does go down. And in Q1, we had one in the very end. We had a very high base effect of last year. So on a quarterly basis, yes, the growth rate may be very small. However, not only us, we also have like new launches out of the competition as well, which also had an impact. However, as of Q2, we also will be launching new products. And we also have very proactive growth strategies that are to be executed. So we will believe that double-digit growth will be profitable in the future.

To answer your second question in terms of the U.S., now you asked your question in terms of B2B and B2C, but you're correct. On a monthly basis, if you just look into the sales trend and the growth trend, overall, in January, February and March, the U.S. market was most highly impacted by COVID in March. So with March becoming a tipping point, we actually are seeing a recovery. And as of base effect of January and February, the overall U.S. market -- the B2B. So the food service channel, yes, it was impacted. However, with B2C, pizza market against the previous year, if you'd say -- it's a bit stagnated. But we actually consider our growth driver was Asian food, which you want to create synergy out of, especially K-food and Mandu, with that being high growth in Q1. Those were the drivers of the growth.

And due to time constraints, we'll take the final question. So we have Mr. Kim Jungwook of Meritz Securities.

I have 2 questions. First, in processed food, if you think the margin in online -- and so I want to see a comparison between margin between online and offline. With the increase in online, is it actually contributing to raising margin for the company as a whole? And as for Bio, we are seeing very good prices for feed additives, so we want to see what competitors are doing in that space.

So regarding your first question between comparison of margin between online and offline, we do not have margin information by each channel, so apologies there. But for the first quarter, for online and offline, in general -- for channels in general, in terms of operating margin, we are seeing improvement. As for the second question regarding Bio, there has -- the market has been very good recently. So we have been monitoring what our Chinese competitors are doing. So for Meihua, since last year, they have already begun capacity upgrade for lysine of about 300,000 tons. So that construction will be completed at the end of this year. So there would be increased capacity there. But the -- if we think about GBT, they have long lost their competitiveness, so they have suspended their plant operations. So considering that, we feel that there hasn't been any dramatic capacity increase from competitors as of now. But of course, we will continuously monitor what the competitors are doing. And what I can tell you is that regarding new plans or dramatic CapEx increase, we have not identified -- we have not detected such movement from our competitors yet.

Okay. So we will now conclude the Q&A session and we will now conclude the -- today's session. Thank you very much for your time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]