CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us today. We'll now begin the Conference Call for Q2 2021 Results Report by CJCJ. For today's conference call, we'll first have the presentation by CJCJ, followed by a Q&A for all the participants here today. [Operator Instructions] So we'll first begin with the presentation by CJCJ. Ladies and gentlemen, I am Jun Seong, Head of IR Team and Finance Strategy Officer CJCJ. We'll now begin the Q2 2021 business results report for CJCJ. Let me remind you that Korean to English simultaneous interpretation will be provided for foreign investors. Let me first introduce today's participants from CJCJ. We have Mr. Kang Kyoung-Suk, Head of Finance Strategy Office; Mr. Ansan Jung, Head of Finance Planning Department; Mr. Kim Jung-Ho, Head of Korea Business Management and Food Business Unit; Mr. Cho Jin-Man, Head of Global Business Management and Food Business Unit; Mr. Kim Sang-Min, Head of Business Planning team at Bio Business Unit; and Mr. [ Hwang Hyun-An ], Head of Business Planning Team of Feed & Care. So Mr. Kang, the Head of Finance Strategy Office, will first walk you through the business results, followed by issuing outlook report by respective presenters. We'll then move on to Q&A.

Ladies and gentlemen, I am Kang Kyoung-Suk, Head of Finance Strategy Office at CJCJ. Let's first look at Page 5. In the second quarter of 2021, we achieved growth of 9% in sales and 26% in operating profit year-on-year. First, for Food, despite increased commodity and logistics costs, we have been able to maintain previous year's OP level with continuous improvement in profit structure. In Global business, we have expanded sales of K-Food and our plans to build and reinforce Bibigo brand abroad are well on track. In bio, based on market leadership, we have proactively increased prices and strategically expanded sales, resulting in significant increase in operating profit. In F&C, rising grain prices declined, and hog ASP have been mitigated by biosecurity performance and productivity enhancements. Next page, please. And here, you can see the highlights of Q2 2021 results. First, excluding CJ Logistics. For sales, with expansion of key products at growth channels both in and out of Korea for Food, an increase in sales for Bio and F&C based on market leadership, we have been able to achieve sales of KRW 3.7558 trillion, up 9% from the same period last year. For operating profits, with continuous improvement in profit structure at Food, strategic prices increase at Bio and improvement in livestock productivity in F&C, we have achieved operating profit of KRW 379.9 billion, up 26% from the same period last year. In terms of net profit, we reached KRW 219.2 billion, representing an increase of 75% year-on-year with improvement in operating expenses, along with the rise in operating profits. And including CJ Logistics, sales grew 6.6% year-to-year to KRW 6.3092 trillion, and operating profit rose 22% to KRW 469.6 billion. Now let's look at Page 8. Let's look at performance for each business for stuff food. Deferred sales grew 1% year-on-year. For sales in Korea, the slight base effect from last year in B2C business, we have expand the sales in growth channels, namely B2B, convenience stores and e-commerce. And with launch of new premium products, we have been leading the premium eating-at-home space. As we sustain such quality growth, we achieved growth of 5% to KRW 1.2023 trillion in sales at home. For Global, there has been some decline in sales when converted into Korean won due to stronger won versus 2020. But with strategic response to B2B in light of pandemic-driven changes in the U.S. and China and expanded sales of K-food in key regions and channels, we have been able to mitigate the negative impact of FX, achieving sales of KRW [ 1.0113 ] trillion. As we're operating profits with continuous improvement in profit structure and efficient execution of resources, we have been able to achieve operating profit of KRW 129.9 billion, recording 3% increase in year-on-year. And in Korea, some of the burden from increase in grain and commodity prices have been offset by improvements in profit structure by value chain and increase in ASP of certain items. In Global the burden has been partially mitigated with efficient use of promotional resources and expansion of K-food sales in the U.S. and Japan -- in China and Japan. If you look at the slide on the next page, Q2 OP margin is around 6.2% when excluding Schwan's PPA and 5.9% when including Schwan's PPA. And if you look at Page 10, I would like to take you into the specific of sales in Food in Korea and Global. First, in Korea, business in terms of products, we have seen continued growth for core products such as Hetbahn, HMR and Mandu. And we have also been leading the market with launch of new premium products such as Gourmet pizza, sweet and sour pork, Hetbahn sotbahn and wash and eat noodles. In terms of channel, we focused on growth channels for processed food, namely e-commerce, B2B and convenience stores. So in Q2, sales for Korea Food business is KRW 1.2023 trillion. And Page 11 for Global Food business. First, for the U.S., despite high base effect, we have been able to maintain previous year's level. In B2C, despite previous year's base effect, we have expanded sales of K-Food with differentiated taste and quality that mitigated decline in sales. The compared to Q2 2019 pre-COVID, we actually grew more than 20% in sales. In B2B, we have seen expansion of key products such as pizza, eggroll in K-12 and C-store channels, leading to a sharp recovery in sales. And for Asia Pacific and Europe, we have continued with high growth in -- to strong B2B with recovery and aiding out an expansion of K-food sales. As a result, China grew 5% and Japan grew 51%. So for Q2, Global sales reached KRW 1.0103 trillion. And next on to Page 12 on Bio business performance. Enabled by market leadership, Bio has proactively raised ASP and pursued strategic expansion and sales at the same time. That helps Bio mitigate the burden from rising commodity and logistics costs, resulting in a significant increase in operating profit. For sales, we actively took advantage of our existing market dominance and recovery in China's hog population, for strategic expansion in sales. As a result, we achieved sales growth of 24% year-on-year. In terms of operating profit, with preemptive price increase and maximize product sales, we achieved record high quarterly operating profit of KRW 193.9 billion, up 75% from the previous year. By product, for feed additives, we have taken leadership in strategic pricing of key products, taking into account rising commodity prices. By leveraging diversified manufacturing bases worldwide, we have minimized the impact of increased in commodity and logistics costs and led the trends of using less CP to continue site identify new markets and customers. For food additives, we have leveraged our market position to proactively lead nucleotide markets. And by promoting high-margin specialty products and accelerating efforts to develop new markets with TasteNrich, we have achieved growth in sales. If you look at Page 13, Q2 operating profit margin reached 21.1%, which is a dramatic increase from last year. And you can also see the increase in share of specialty products in total sales mix. And next, on to Feed & Care on Page 14. In general, rising commodity prices and downturn in Vietnam hog prices have been mitigated by expanded sales of Aqua feed enabled by R&D and improved productivity through biosecurity. In terms of sales, F&C experienced 19% growth year-on-year with increase in feed ASP, expanded sales of high value-added Aqua feed, improved productivity through livestock biosecurity and expanded downstream volumes. In terms of operating profit, it was down by 13% year-on-year to KRW 56.1 billion. To make up for the belated pricing increase that came only after the rising grain prices and to offset the impact of decline in hog ASP in Vietnam, F&C responded with improved feed portfolio and higher livestock productivity and cost competitiveness. By product, for feed, rising grain prices and belated pricing increase weighed down on profitability. But F&C pursued stable volume expansion in hog and poultry with profit-driven structure improvement. And F&C also expanded sales of high value-add Aqua feed based on quality, cost competitiveness and technical services. For livestock, the downturn in hog ASP in Vietnam had been partially mitigated by improved productivity and expanded sales. By expanding downstream value chain infrastructure, F&C strengthened to risk hedging against lower livestock prices. In Indonesia, we have secured cost competitiveness with continuous improvement in profit-driven business structure. With decline in supply of poultry in the market, prices have risen, resulting in increased operating profits. If you look at the next page, you can see that OP margin for F&C declined by 3.2 percentage points year-on-year to 9%. Now let's look at CJ Logistics performance on Page 16. CJ Logistics pursued increase in prices in response to rising costs for supporting personal delivery drivers and parcel classification work. There has been base effect in domestic logistics, including port handling volumes, so sales in Q2 stood at KRW 2.7472 trillion, up 4% from the previous year and OP at KRW 90.6 billion. Slide 19 shows SG&A and nonoperating income and expenses, including CJ Logistics. CJ and SG&A expenses, similar to last year, was 22.3% out of the sales. Nonoperating expenses, down by KRW 48.3 billion or negative of KRW 40.5 billion. For inflation in sea freight cost and oil price drop of transportation cost by KRW 38.4 billion. Promotion and advertising cost jumped by KRW 22.1 billion. But SG&A remained at a similar level to last year's. For nonoperating expenses, the interest income improved by a great margin of KRW 14.5 billion, and the total non-operating expenses were up by KRW 48.3 billion. What if CJ Logistics included, this SG&A and nonoperating income are mostly determined by CJ Cheiljedang businesses. So we'll skip Slide 20. Next, we'll go over progress on key strategy and outlook. First, we will begin with an update on the U.S. business, and then that will be presented by Mr. Jin-Man Cho.

Good afternoon. My name is Jin-Man Cho, Head of Global Food business department. Last year's panic buying due to COVID-19 and this year's B2C pizza market contraction were manageable enough for our Food business to drive a moderate level of sales so far. Pizza business market share grew and the rebound of the B2B business are currently setting the stage for us to drive further growth. The second half sales in dollars was down by 2%, but this was due to stockpiling by consumers last year in the home service segment. Consumer brand, Food Service and other business units combined together for the U.S. business growth representing sales. Schwan's Foods Home Service is a frozen food delivery business, which was not excluded from the Schwan's Food acquisition deal. Schwan's Food currently manufactures and supplies frozen food to the home service unit. Compared to pre-COVID, Schwan's Food sales grew at the fastest pace among other frozen food manufacturers in the U.S. If you look at the graph on the right -- on the left, in the B2C frozen food segment, the annual sales as of June 2021 grew 32% compared to the annual sales of June 2019. This is thanks to the growth of the frozen pizza market itself, but highly attributable to the strong growth of our market share. After the acquisition of Schwan's Food on 2019, the B2C pizza market saw continued growth of Schwan's market share. This has been possible with DSD and sales network and also Red Baron's portfolio upgrade and our focus on high profit SKU's. With all this effort, the market share gap to #1 pizza player narrowed from 22.9% in 2018 to 15.9% in June 2021. Meanwhile, with consumers resuming outdoor activities, the B2B channel sales is on track to recovery. Schwan's Food Service sales in the second quarter grew 79%. With broader vaccination and schools reopening throughout the month following September or the high season for K-12 channel, dumpling shipments and headcounts will jump in number to continue on that fast-paced growth. Now moving to K-food business growth in the U.S. The dumpling market share in the grocery market -- grocery channel continues to expand. Bibigo's dumplings market share in the grocery channel grew from about 14% in Q2 last year to about 25% in Q2 this year by 11 percent points. With Schwan's Food existing brand and Pagoda's dumplings market share combined together, our dumpling market share in the grocery channel is 38%. And now we're #1 in dumpling grocery channel. Next, dumplings for the U.S. market in the pipeline are chicken, fried rice and K-sauce. Our chicken's crispiness and garlic and gochujang based Korean flavor present differentiated experiences, resulting in distribution to 2,400 grocery retailers in the first half. The chicken sales grew 51% in 2020, and this piece will continue. Our fried rice offerings also features Kimchi and Korean sauces that offer Korean authentic taste. It has been distributed to 3,000 retailers which will expand further in the second half. And for K-sauce, the very first product adopted Gotchu a gochujang based hot sauce was launched in the U.S. In the second half, it will make its way into larger retailers. And we also plan to open a new D2C website and run consumer trial events to expand consumer experience. [indiscernible] longterm brand building is also underway for our brand Bibigo through social media, banner ads and influencer endorsement, and we raised unaided awareness from 22% to 26%. In the second half, the consumer trial events and promotions during sports events will continue. We have worked with the retailers to create in-store Asian destination zones, which continue to grow in number. Kroger's in March 2020 had one store with the Asian destination zoned. And the number went up to 293 as of June this year. We are set to drive up the number to 600 by the of the year. And other than Kroger, so we are to expecting to expand -- we want to expand the Asian destiny zoned and other retailers. Next page, on update, the busy Micho business in Japan. Japan's vinegar drinker market's initial target consumer segment was the middle-aged group, but Micho was aimed at females in their 20s and 30s. Fermented flavored K-beauty drinks having a successful concept of differentiation in Japan. 10 years from the launch in Japan, Micho has now become a powerful brand worth KRW 100 billion. In the first half, it has posted sales of KRW 73.6 billion. With continued product differentiation, channel expansion and broader awareness, Micho was expected to grow more than 50% on a yearly basis. For diverse offerings, the diluted version will have more flavors with ready-to-drink and jelly type lineup to have new product offerings. When it comes to channel strategy for Micho, Micho's primary focus was Costco, but now we're making our way into convenience store and drugstores with Micho's penetration B2C reaching 60% to end in the second half. For a stronger brand awareness of Micho, we did TV commercials. And also, we were on Instagram and other social media platforms to communicate how to enjoy Micho to consumers with different live sales. Menu development with tea and coffee chains are underway as we discuss potential mash-ups with bakery, cosmetics and apparel brands to further amplify the brand awareness. Now we'll move to an update and Bio's progress in creating new growth momentum. Mr. Kim Sang-Min.

Good afternoon. Let me present highlights of our Bio business. Bio business unit has long accumulated the world-class competency in microbial strain and fermentation. And now we're emerging from Green Bio to White and Red Bio. Our Green Bio business, so with the competency in Microbiome engineering and control as well as the fermentation, production and purification is expanding into White Bio that involves plant organism based in material development and production. And in White Bio marine degradable bioplastic, or PHA, as our current area of focus to build infrastructure and partnership with HDC Hyundai EP. So from a material manufacturer, we will emerge as a material compounding player to extend the value chain to leverage not only PHA but a diverse set of the bioplastic materials to develop applications to solidify our position in the White Bio space. The Bio business unit competency in microbial screening and efficacy assessment are currently serving as assets for us to venture into the Red Bio space. Microbiome medicine, which can replace existing generics and biologics, is in the spotlight of the industry as a new promising technology with a high potential for a fast-paced growth. Last July, we acquired a microbiome company ChunLab which specializes in strain, profiling and genome analysis. With ChunLab's competency and our expertise in microbial technology combined together will create a synergy to accelerate microbiome-derived drug development and gain differentiated competitive advantage and customized health functional food. Next is an ESG update. CJ Cheiljedang operates under the motto of: From Nature to Table, Table to Nature, to create a virtuous cycle of nature to nature. To join efforts to stop the deforestation and go eco-friendly from ingredient sourcing, CJ select a plant to source zero soybeans from the Amazon rainforest and to partner with local businesses to run a council to fund local farmers and source 100% of their soybeans as part of the seed project. Development of 100% to biodegradable material or PHA to create an eco-friendly cycle as a critical business for our ESG practice. PHA is the only marine biodegradable plastic material that has been granted all four compostability certifications by TUV Australia. The manufacturing base for PHA will be completed by the end of this year. New applications will be developed while creating demand to replace the existing petroleum-based plastics. We're also working to ensure human rights of stakeholders. To identify human rights as [ taking ] advance and contribute to addressing relevant issues, detailed work plans are currently in execution. And also to commemorate the international year for the elimination of child labor this year, CJ Cheiljedang signed the UN ILO conventions for ending child labor. To further embed the value of ESG into our management, we have newly launched the Sustainable Committee. And within the Board, in climate change, sustainable sourcing, sustainable supply chain will be among themes to be addressed by the committee. And other key ESG matters will be discussed and reviewed up for our strategies and finally, pass the committee. And we'll now move to our outlook for the third quarter. Inflation of commodity price and logistics costs and declining livestock prices in key countries are expected to stay through other unfavorable business environment. We'll continue focus on profit structure improvement while leveraging the recovery of the B2B Food market and K-food growth in the global market. Our sales strategy will reflect the market trends and strong market position to cope with industry headwinds. Food business in Korea will continue to be faced with commodity price inflation and COVID-triggered panic buying on the B2C segment, but this will be made up by driving strong sales of core products as well as B2B sales with newly launched B2B brand, with gift to sets during Chuseok. For the U.S. Food business, the impact of the pizza pricing strategy, launch of key new products, broader channel coverage of key food, extension of new dumpling category lineup and recovery of the B2B market, including K-12 segment with strategy -- sales expansion across key channels expected to yield growth in sales. For Japan, Micho sales during the high season and K-food growth, including dumping, will continue to drive fast growth in sales. Bio feed additive business will face headwinds due to a slowing hog cycle in China and commodity price and logistics price hike. However, with continued sea transportation price inflation will take advantage in the logistics costs enabled by our global presence. While leading trends in crude protein use reduction of the industry will increase the share of feed additive from feed products to mitigate the grain price spikes. For food additives, the nucleotide business was driven by profit-centric operations with plant-based and clean label food demand on the rise, TasteNrich is expected is to yield a high growth while other specialty products. Next is on outlook on Feed & Care. Another wave of COVID-19 in Southeast Asia will lead to contraction in overall demand as well as lower livestock prices. For feed business, we will increase prices in line with the grain price hike and diversify the high-margin portfolio. With that, we expect our overall sales to post a mid- to high single-digit growth while the operating profit margin will be at a similar level with the same period last year. And that is it, the end of our prepared remarks, and we're ready to take questions.

Questions in Korean will be simultaneously interpreted, but questions asked in English will be consecutively interpreted. [Operator Instructions] So we have the first question from Kiwoom Securities, Mr. Park Sang-Jun.

I'm Park Sang-Jun from Kiwoom Securities. So I have three questions. So my first question has to do with the Q3 outlook. In terms of sales growth rate or operating profit, compared to the second quarter, it seems to be slightly down from Q2. So it could be because of changes in Bio market situation or margins spread in F&C. So regarding that, could please elaborate on your Q3 outlook? And as for the second question, it has to do with the U.S. Food business. For Schwan's business, it seems like the market share has risen. So I mean whether it be Red Baron portfolio upgrade or focus -- you mentioned you're focused on high-margin products. So can you also elaborate on why -- how that was possible? And my third question also has to do with U.S. business. For Mandu, we're seeing increased distribution rate in the U.S. So in the past, I feel that there has been a lot of diversion from our existing focus from costs. So I'd like to know about the specifics of how the channels have been diversified around the existing focus on Costco.

So regarding Schwan's pizza market share, so if you think about pizza in the U.S. So we have the organic and better for your premium lineup, and we have the mass premium and we have general mass lines. So last year, we've had the COVID-19. So what happened was that the prices have gone up. So as for RMS products, we have seen much stronger profitability with that. [ Schwan's ] has the competency with direct sales delivery, or DSD, which is about getting our products direct to the stores. So with that competency of DSD for Schwan's, we actually have the connection with 700 stores so that helped us raise market share. And based on the competency from 20 -- I mean as we move from 2020, amid COVID-19, we have been able to narrow the market share gap against our competitor, Nestle. So -- and as for diversified channels for dumplings or Mandu in the U.S. for the ethnic channels, we have penetrated Mandu -- and we have leveraged the channel of Costco. But our aim actually is to -- I mean -- as for the Mandu that were sold by Schwan's and CJ Foods, we want to leverage Schwan's existing sales platform, so one of that was expanding dumplings or Mandu in the grocery channel. So for grocery, we have the Walmart or Kroger or Target. So these are the areas that we really want to penetrate in the grocery channel. In terms of distribution rates, compared to a major Asian competitor, our distribution rate has been significantly higher. It's actually 58% distribution rate. So we believe that this trend is likely to grow. We began with 35%. But over the past year, we have been able to raise that to 57%. So for the remaining year, we want to raise that to 60%. So that's our plan for increasing our distribution rate in the grocery channel. As for Q3 outlook, if I may elaborate, just like you mentioned, compared to the second quarter, operating profit outlook is lower. But if we think about the second quarter, whether it be Bio or F&C, it has been quite high in the second quarter in terms of operating profit. I think you should take note of that. So in Bio, it was 21.1%. In F&C, it was 9% in terms of operating profit. So for Bio, I mean, in terms of spot prices, the feed additive prices of feed additive had been on a decline from the peak. So that would be reflected later in the contract prices. So compared to second quarter, we will see a decline in the third quarter, but it would still be higher than the same quarter last year. And as for F&C, if we think about Vietnam hog ASP or poultry prices, it's going to be lower than the second quarter. So we factored that in as well. so we feel that it's going to go down on a quarter-to-quarter basis. As for Food, the third quarter is actually one of the high seasons. We have the Chuseok giftset sales, so it's going to increase on a quarter-to-quarter basis. I will take the next question. Just to add on just to have some revisions from our existing material. We have something called All Commodity Volume, or ACV, based on IRI. So that is actually equivalent to the distribution rate at grocery channel. So 57%, I mentioned earlier is based on the IRI data. It's actually based on 13 weeks on an annual basis. So on a quarterly basis, about 50%. And in the material, it says 54%, but that's actually based on four weeks. So just to clarify on the time frame of how the numbers have been calculated. All right. So we'll take the next question.

We have the next question from Ms. Kim from Morgan Stanley.

I have three questions. First, on Bio, I mean, operating profit above 20% for Bio. This is actually quite unprecedented. So of course, there has been increase in price, and there has been a lot of improvements in product mix. Are there -- I mean can you highlight on how such a rapid increase in operating profit has been possible? And what kind of things that you're looking forward to in terms of operating profit at Bio? And my second question is regarding Food business overseas. I want you to -- you have elaborated on the details of the sales. But in terms of operating margin, I mean, if you think about Schwan's operating margin, it seems like that it dipped somewhat. So maybe that's because you're investing in diversity. So that is why have lower operating margins. So if we take Schwan's aside, if I want to know about how the margin for other global business is moving. And my third question -- my final question is with increasing commodity prices, you have -- we have been increasing prices as well. But if you think about process -- I mean if you think about commodity prices burden and as well as the benefits that we get from increase in price, I want to know how these could be aligned with each other? And what kind of your expectations are for the third quarter?

Regarding the operating profit of Bio business, for Bio in the second quarter, we have achieved operating profit margin above 20%. The biggest reason may be a temporary overshooting. There has been high grain prices, and there has been some weighing down by increase in commodity prices, so we have strategically raised our ASP and expanded our sales. In that process, there has been some weighing down by logistics cost, and there was also the issue with Evergreen, so there has been some hiccup with logistics. As a result, the supply from China has not been directed to overseas markets. But because we have worldwide sales network, we had been able to have additional price increase and additional expansion in volume. So that was one of the temporary reasons why we have seen high spike in the second quarter. And [ among ] logistics issues, such logistics crunch has been addressed. So the price has peaked and it's now climbing down. So at current pace, -- so it may not be -- we will not be able to achieve as high a operating margin, but we would be able to offset such increase in commodity prices with our technical sales network as well as our competency so that we would be able to maintain high level of operating profit margin. And as for Global Food margin, for each, we will not -- I would like to ask for your understanding and the fact that we would not be breaking down the margin for each region. But if we look at Schwan's, in terms of stand-alone, it seems like the operating margin has come down somewhat. But the biggest reason is that there has been increase in logistics cost of amid pandemic situation. And we have also seen increase in advertising costs compared to the same quarter last year. So it has to do with the fact that we are actually making mid to long-term investment to strengthen our brand equity. And we have launched new products under Red Baron, so we're investing in advertising. So that could be one of the reasons for taking that decline. So as you have seen in the handout, so we can see the increased Bibigo awareness and increase the market share of Red Baron. So these investments are now coming into fruition, and we will be making these kinds of brand-building activities in the mid- to long term. So other than Schwan's, as for the other regions, there are discrepancies among regions. But in general, we have seen increase in operating profits in global worldwide. It is pretty much similar as the same quarter, last year. And as for increasing price for processed food in Korea. In February, for Hetbahn, gochujang, tofu and bean sprouts, we have various prices for these products. After increasing prices, it takes about two months for that price increase to actually take effect in the market. So after the price increase in February, some of that had been reflected in our second quarter performance. As for the increase in commodity prices, we have made some internal efforts to mitigate that impact by cost savings. And for areas where it would be difficult to lower cost, we would be directing that to increase in price. And as of July, for process meats, including Spam, there has been some increase in prices. And that's going to be further reflected in the third quarter. And in the third quarter, it's the highest season for Food business at CJ Cheiljedang. So especially, we would be focusing on expanding sales of gift sets for Chuseok. And we would also be expanding mega products. And in terms of channels, we want to focus on e-commerce, convenience stores and B2B, so that we can offset the impact of increase in commodity prices.