CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you very much for joining us today. We'll now begin our conference call for the Q3 business results presentation by CJ Cheiljedang. For today's conference call, we'll first have the presentation by CJCJ, which will be followed by a Q&A with everyone who is participating today. [Operator Instructions] We'll now begin the presentation by CJCJ.

Ladies and gentlemen, I am Jun Seong, Head of IR Team and Finance Strategy Office of CJCJ. We will now begin the Q3 2021 business results reports for CJCJ. Let me remind you that a Korean to English simultaneous interpretation will be provided for foreign investors. Let me first introduce today's participants from CJ. 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; Mr. [indiscernible] JB, Head of Global Business Management at Food; [ Mr. Kim Jae Hee ], Head of Business Planning Team at Bio Business Unit; and [ Mr. Hwang Hyun-An ], Head of Business Planning Team at Feed & Care. Mr. Kang will first walk you through the business results, followed by issues and outlook, reports by respective presenters. We'll then move on to Q&A afterwards.

Ladies and gentlemen, I am Kang Kyoung-Suk, Head of Finance Strategy Officer, at CJ Cheiljedang. Let's turn to Page 5. In the first -- in the third quarter of 2021, we achieved 13% growth in sales and 3% in operating profit from the same period last year. For Food, we have been able to address commodity price increase, in cost inflation with sales growth and stronger profit fundamentals. In Global, we have expanded sales of K-Food recovery in Food Service, resulting in sales growth of 10%. In Bio, we have been able to address cost increases, thanks to our extensive operation across the world and interoperability and production that resulted in strong performance. Next page. Here, you can see the highlights of Q3 2021 results. First, excluding CJ Logistics. For sales, by focusing on growth channels at Food in response to business environment changes, both in and out of Korea, in addition to increasing sales of Bio based on market leadership, so we have achieved sales of KRW 4.2243 trillion, up 13% from the same period last year. For operating profits with continuous improvement in profit structure, we have seen improvement for both Food and Bio, resulting in OP of KRW 322.2 billion, up 3.3% from the same period last year. In net profits, we reached KRW 167 billion, representing an increase of 3% year-over-year. Including CJ Logistics, sales grew 8.1% to KRW 6.8541 trillion, and operating profit rose 7.7% to KRW 433.2 billion. Let us now turn to Page 8, for -- with the results of each business unit first up is Food. Deferred sales grew 8% year-over-year. For sales in Korea, we focused on growth channels in response to changing business environment. We expanded core products and new products with differentiated benefits. And based on optimal portfolio, we pursue strategic increase in sales of Chuseok holiday giftsets. As a result, we achieved growth of 6% year-over-year to KRW 1.4536 trillion in sales at home. For Global, there has been some sharp increase in B2B sales, thanks to recovery in dining out demand in both the U.S. and China. And with expanded sales in K-Food, including dumplings or mandu, we have been able to mitigate the negative impact of increasing value of the dollar, achieving sales of KRW 1.1254 trillion, up 10% year-over-year. For operating profits, with continuous improvement in profit structure and efficient execution of strategic resources, we have achieved operating profit of KRW 186 billion, up 6% year-over-year. In Global, commodity and logistics cost increase have been persistent, but the burden has been partially mitigated by focusing on high-margin channels and products and efficient use of promotional resources. And if you look at the chart on the next page, the Q3 OP margin is around 7.6% when excluding Schwan's PPA, and 7.2% when including Schwan's PPA. Let's now look at Page 10 on the specifics of Food performance in Korea and Global. First in Korea, in terms of products, we have seen continued growth of core products. We have also seen introduction of new and differentiated products such as fried Chinese cuisine, chicken breast meats and Hetbahn sotbahns that aim to replace restaurant menus. In terms of channel, we focus on growth channels for processed food, namely e-commerce, B2B and convenience stores. All in all, sales for Korea Food businesses in Q3 is KRW 1.4536 trillion. And next, on to Page 11 for Food Global. First, for the U.S., thanks to positive sales performance in B2B with recovery in dining out and expanded sales of pizza/rolls and K-Food leading to growth in B2C sales as well, we grew 8% in the U.S. compared to the same period last year. For Asia Pacific and Europe, we have continued on with high growth, thanks to strong B2B with recovery in dining out and expansion of K-Food sales. So China grew 15%, and Japan grew 45%, thanks to strong performance in Micho. Europe also grew 27%, resulting in overall sales growth of 19%. All in all, global sales in Food in Q3 reached KRW 1.0254 trillion. And next is Bio on Page 12. Enabled by market leadership, Bio has proactively raised ASP and pursue strategic expansion in sales at the same time. It also developed specialty product marketing customers through technical marketing, resulting in positive performance. As a result, we achieved sales growth of 35% year-over-year, reaching KRW 1 trillion in quarterly sales for the first time in history, and OP grew 61% year-over-year, recording quarterly operating profit of KRW 127.5 billion. If you look at each product for Animal Nutrition, we have successfully raised prices in light of changing business environment, enabled by our extensive global network and interoperable production competency. We have also led the trend of using less crude protein through continuously expand demand for amino acids. For Human Nutrition, based on market leadership in nucleic acids, we have pursued strategic sales targeting high ASP customers and regions. We have also accelerated our efforts to create new for specialty products such as arginine and TasteNrich. Next page. Our Q3 operating profit margin reached 12.2%, and sales of high value-added specialty products have maintained 2-digit percentage in total sales mix. And next, on to Page 14 on Feed & Care. In general, increase in animal feed prices led to growth in sales, but OP has declined due to sharp downturn in Vietnam, hog prices have spread after pandemic. In terms of sales, global price increase with rising grain prices drove our feed sales. Decline in consumption due to heightened social distancing in Southeast Asia pulled down livestock sales performance. As a result, sales increased year-over-year stood at around 2%. But for OP, it stood at $8.8 billion, down 85% year-over-year. With continued lockdown in Southeast Asia in light of the pandemic, there has been disruption in distribution in Vietnam and consumption declined resulting in temporary decline in the price of livestock. If you look at each product for feed, we have mitigated the impact of rising commodity prices, with a continuous increase in prices. At the same time, we have pursued stable volume expansion in hog and poultry and worked on improving low-margin customers. Furthermore, we focus on expanding market leadership with high value-added Aqua business in Indonesia. For livestock, the prolonged lockdown in Vietnam and downturn in hog ASP in Vietnam arising from the fall in pork market that had been partially mitigated by improved productivity and expanded sales enabled by biosecurity competencies. And by expanding downstream value chain infrastructure such as -- and because of the – with rising volatility in poultry prices in light of the pandemic, but there has been government-led efforts to stabilize the market and continued efforts for structural improvement to help us gain cost competitiveness as well as increased profitability. So we achieved op margin of 1.5%. And let's look -- briefly look at CJ Logistics' performance on Page 16. CJ Logistics pursued increase in prices for parcel delivery. With recovery in volume and positive performance of forwarding, CJ Logistics has to been on gross track. So sales in Q3 stood at KRW 2.8465 trillion, up 3% and operating profits at KRW 105.3 billion, up 14% year-over-year. And let's look at the nonoperating expenses and costs for the next page. SG&A made up 23.3% and nonoperating income stood at negative KRW 98.5 billion for Q3. In SG&A with inflated cost from maritime transport and oil price rise, transportation expenses grew KRW 69.7 billion, advertising expensed by KRW 14.6 billion, but was streamlined resource operations, improved by 0.4 percentage point. The nonoperating income declined by KRW 39.1 billion due to FX impact, resulting in negative KRW 98.5 billion. Page '20 with CJ Logistics included, SG&A and nonoperating income primarily have been determined by CJCJ's performance. Thus I'll go ahead and skip this slide. So next, moving on to progress on key strategy and outlook. We'll first begin with U.S. business. Good afternoon, ladies and gentlemen. My name is [indiscernible] from the Global Business management.

The U.S. business has seen high-growth in sales of pizza, mandu and other core products with the help of a recovery of demand for B2B food services and broader coverage of K-Food distribution. First, on Schwan. Despite of the impact of COVID resulted in contraction of the B2C pizza market, Red Baron launched new premium offerings and expanded sales of rolls to post a high single-digit sales growth. In Q4, in response to the peak season for pizza and pie and the continued inflation at Schwan's will push for a price increase to improve sales and profitability. For B2B, thanks to demand rebound and key product sales growth there has been a spike in sales, with the recovery of out-of-home and catering demand in key channels such as K-12 and top chains have seen growth in key products sales such as pizza and roll, resulting in a 70% growth increase in sales. A focus on -- in Q4, we'll be maintaining leadership for key products categories, while increasing price to further drive sales growth. On K-Food in the U.S., Mandu continues to expand its presence in the grocery channel. Bibigo's market share in grocery grew 13 percentage point year-on-year, posting 28.2%. And with Pagoda, Mandu included, Mandu's market share in grocery stood at 39.3%, successfully keeping the #1 market shareholding position. Also Bibigo Mandu's ACB or distribution rate in grocery rose 22 percent point year-on-year to 56.8%, which is a steady upward trend. To raise the awareness of the brand Bibigo. Bibigo has become a new sponsor for LA Lakers, the hottest NBA team with a new marketing partnership. Having Bibigo brand up here on uniforms and social media platforms, we expect to see improved brand exposure. For next Mandu product, frozen readymeals, which are chicken and fried rice have expanded distribution in the grocery channel, along with drive for promotion for Costco, generating more than a double growth year-on-year and year-to-day sales. Gotchu our K-Food offering has been running a DTC website, and it will roll out products in additional platforms. Next is on Bio business, external environment and our responses.

Good afternoon. My name is [ Kim Jae Hee ] for Bio business management team. The global market landscape for our Bio business has been phased with growing uncertainties as different factors playing out. Despite this, with our strong R&D and solid global presence, we will minimize the impact of uncertainties in outside environment, pushing for quantitative and quality growth. The first uncertainty expected to stay is prolonged inflation that drives up the price of commodities such as grains and crude oil, which are weighing on cost. However, our stable and efficient sourcing and flexible manufacturing based operations in line with market landscape changes have allowed to stay competitive in cost compared with our peers. Also as #1 global Green Bio company, CJ has a strong presence to lead price increase, which will help offset the impact of commodity price increase. The second uncertainty is a stagnated logistics movement and has spike in maritime transport costs, which are expected to stay for a while. But we have the advantage of diversified manufacturing and sales basis, which allows us to operate flexibly to allocate expenses by market and product. Against Chinese peers, we have a shorter distance between supply and demand, which yields us competitiveness in export. With such a solid global swing, we're using different tools. CJ will continue to improve logistics costs. Lastly, another certainty we're faced with is -- China with some power shortage and energy regulations. Although to a limited degree, CJ's point operations have been affected. However, with diversified manufacturing bases and comfortable product manufacturing that minimize potential volume shortage, CJCJ has taken advantage of the market landscape, where the source of supply from China remains unstable. We have strategically expanded sales volume and leveraged supply shortage to increase prices. Next is on our ESG update. If you go to the next slide, CJCJ is committed to build a sustainable resource circulation system. On your left, you can see that some of our efforts are using sustainable packaging and new sustainable businesses for packaging with design, recycle and recover, or the 3 R policy at the core of our sustainable packaging policy, and this enabled plastic use reduction of 10,010 tons in 2020. We also developed and commercialized 100% biodegradable plastic or PHA plastics to build a plastic circulation system. CJCJ's Green Bio businesses focused has been sustainability, which has been supported by sustainable product development and marketing efforts. Impact of our efforts have been once again recognized by Professor Sung-woo Kim of North Carolina State University during his presentation at VIV Asian seminar, Asia's largest livestock industry exhibition. Has been demonstrated that CJCJ's amino acid and enzymes, when applied to live stocking help reduce environmental contaminants such as nitrogen, CO2, methane, minerals of which ESG impact has been validated by lot data. Next is on Q4 forecast. Inflation for commodities and transportation, the power shortage in China and other unfavorable factors in the business landscape are expected to stay, but our differentiated brands, R&D and manufacturing competency will help us to maintain market leadership with key products in key channels, while we closely monitor our K-Foods growth worldwide and keep up with the current margin level for our Bio business. The Food market in Korea will continue to see commodity price inflation, but with our competency in R&D and brand power, we'll drive mega growth of trendy products with focus on strategic channels and premium tied products to enhance the product mix while reducing manufacturing and sourcing costs. Moving on to our overseas Food businesses. For the U.S., we'll keep pushing for the pricing strategy for pizza and other key products, along with new product launches, K-Food channel and product expansion, strategic coverage increase in B2B channel including K-12 to drive sales growth. In Japan, with diversified product and channel for Micho and extended presence of our highly differentiated Bibigo Mandu, we expect to see growth in sales. In China, engaging in large scale, sales promotions and diversifying online platforms in addition to Tmall and jingdong.com and adding new K-Food offerings are expected to set a stage for high growth. On our Bio business, so -- while uncertainties remain, including China's power shortage for the animal nutrition business, we'll execute the pricing strategy to capture opportunities presented by inflation and limited supply in the market, and our global presence is expected to help us with stable supply, further adding momentum to growth. And TasteNrich and our FlavorNrich and other premium offerings to growth will continue. And on our Feed & Care business, thanks to easing of lockdown in Southeast Asia, we expect rebound of Livestock prices with feeding ingredient prices stabilizing, which will help improved profitability compared to Q3. For the Feed business, we'll focus on price increase, portfolio diversification and profit centric business structure, which will altogether drive growth. For the Livestock business, based on our strength in biosecurity, we expect to see improving productivity while our priority given to value train and competency. In summary, we expect to record a high single-digit growth in sales and OP margin at a similar level at the same period last year. Next, moving on to CJCJ's midterm strategy. Let me now walk you through CJCJ's history of growth. CJCJ has been evolving in Food, Bio and F&C alike in terms of market presence and product portfolio, recording solid 2.5 fold growth in sales over the past 10 years. Food has seen continuous transformation in its product and category with creation of HMO market in Korea and pursued global growth with acquisition of Schwan and expansion of K-Food. And Bio shifted focus from commodity products such as lysine with high OP volatility through high-margin products such as nucleotides and tryptophan to achieve solid #1 market position. With development of new specialty products such as arginine and TasteNrich and pursuit of new growth business in White Bio and Red Bio, it is continuously evolving its business portfolio. F&C has been expanding globally in Vietnam and Indonesia and improving profit structure, while at the same time, utilizing biosecurity competency to enhance Livestock productivity and cost competitiveness and expanding in high-margin feed products such as Aqua. And now CJCJ is set to focus on 4 core growth engines of CPWS, namely culture, platform, wellness and sustainability to transform existing business and accelerate global and digital expansion. We'll have each presenter talk about midterm direction and strategy for each business units.

Hello, I am [ Kim Jung-Ho ], in charge of Korea business. Food will focus on penetrating further into daily lives of global consumers and delivering the value of new wellness. We'll focus on scaling up 6 global strategic products with potential both here at home and in global, such namely Mandu chicken, processed rice, K-sauce, Kimchi and Seaweed. So these are so-called GSP, and we will be further scaling up these products in the global territory. And further to expand global territories, we will scale up core products in each region, mainly in the U.S., China, Japan and Europe and expand K-Food channels and products with Mandu as our core products. We will also strengthen global presence by exploring into white space markets. And third, we will expand into new and adjacent business areas. We plan to evolve into a business portfolio that delivers the value of health and wellness and sustainability, including health and functional food, plant-based and AgTech, agricultural technology. And for a new business where synergy creation is possible with K-food, we plan to secure differentiated products and technology by investing in start-ups. And next up is Bio. For Bio, we seek to become a specialty based biotech solutions partner. To that end, we will secure future growth engine in White Bio and Red Bio. For White Bio, we will build facilities for mass production of PHA and develop applications. So as you go into Bio Solutions partner to respond to needs for sustainability. For Red Bio, we plan to develop strains, expand pipeline, secure internal development competency and create synergy with ChunLab that was recently acquired to accelerate microbiome drug business. In the existing Green Bio business for animal nutrition, we want to focus on portfolio rebalancing and differentiation in format to enable stable profit structure and grow into a protein solution provider. In human nutrition, we will continuously develop premium food ingredients such as TasteNrich and FlavorNrich and strengthen global supply chain to evolve into a total solution provider.

And finally, for Feed & Care, I am [indiscernible]. So for Feed & Care, we want to evolve into an R&D and new future business driven portfolio. To ensure fundamental competitiveness in each business, we want to focus on upgrading business structure in animal feed and expanding Aqua. For livestock or care, we seek to leverage biosecurity competency to maximize productivity and strengthen value chain for a more robust profit structure. We also plan to expand business with focus on countries that are seeing rapid growth around the world. At the same time, we plan to accelerate growth by securing technology and pursuing new business. This means ensuring R&D and tech-driven competitiveness in core technology and also means entering new business into future, such as animal health care to complete the end-to-end integration from feed, livestock distribution through processing. That is it for today's presentation, and we'll now move on to Q&A.

For a Korean Q&A, simultaneous interpretation will be provided into English, but for questions of English consecutive interpretation will be provided. I will now begin the Q&A session. [Operator Instructions] Our first question is from Mr. Park Sang-Jun from Kiwoom Securities.

I am Sang-Jun Park of Kiwoom Securities. I have 3 questions. First is for our group -- for the past 3 years, we have -- there is media coverage that we will be investing $10 trillion over the 3 years. And I think we've heard some elements of your midterm strategy. So we would like to know how much CJCJ has in that KRW 10 trillion share as well as the investment allocation for each business? That's my first question. And we would like to know how much increase in investment we are seeing from past investments for this round of investments? And second, for Bibigo Mandu in the U.S., our market share has been growing according to your report. So we would like to know what the sales growth is for Bibigo Mandu. We would like to know more about how the channel mix is changing. So that's my second question. And finally, in Korea HMR, sales growth, it seems like it is somewhat stagnant. So we'd like to know CJCJ's view on this and what you want to do about HMR market in Korea.

First, regarding our CJ Group's plan for investment for the next 3 years. So for CJCJ total investments in terms of -- it should be able to be within our management level -- within our EBITDA level growth. And by 2020 -- I mean, in 2020, excluding CJ Logistics, our EBITDA was KRW 1.8 trillion and this year, it's about KRW 2.0 trillion. And after 2022, we feel that our EBITDA will be above that size. So based on that EBITDA scope, our investment has been set accordingly. As for our investment targets, we may not be able to share the details at this moment, but we would be looking into Global Food as well as White Bio that we have mentioned before as new growth engines. So they will take up a lot of the portion in our new investments. And as for existing Green Bio business, we will be expanding CapEx for facilities. And of course, we will also be including Red Bio as new growth engine as well. So investment will be allocated along these lines. As for Bibigo Mandu market share as well as channel mix. So based on IRI data, so this is the market data for the U.S. market, which shows the overall picture, excluding B2B. If you look at B2C alone, we have done about KRW 400 billion in terms -- I mean, based on the data, but in the U.S. market. If we look at Mandu or dumplings alone, in the U.S., there is this channel called grocery channel, so like Walmart and Target, and they have club channel, which is mostly Costco or Sam's Club. So if you look at the channel mix, if you look at the entire B2C market, it's about 50% mix. I can't say it's 50%-50% exact, but we can say that the market is about half and half in terms of channel mix. So in the club channel, CJ has done phenomenally well. It has taken very -- has taken dominant market share in the club channel. So we have been doing very well in club. And as for grocery channel, whether it be Mandu or Asian, we have been able to become #1 because in grocery, we have leveraged Schwan's platform, and we have been able to leverage that to enter top grocery channels, and that helped us maintain #1 position. So all in all, if you look at the U.S. Bibigo Mandu market, the growth rate is in double digits, and it has been continuously growing into the third quarter. And regarding the HMR market in Korea, so if you look at the total growth rate for the year, it may seem like it is stagnating, but compared to 2019, it has actually shown the highest growth rates. And especially for the third quarter this year, we've had Chuseok during September, so there has been some slow growth for HMR type products. So there has been the issue of timing. And so we are happy focusing on growth in HMR, but we have to also ensure profitability as well. So we have been doing some -- we have been discontinuing some of the low selling products, and these kinds of efforts have been undertaken in parallel. So that could help explain for the slight decline or stagnation in HMR performance. And if you look at the bigger picture, there is the -- there is some shift from dining-at-home to dining out in light of the pandemic effect. But dining in is continuously holding up because there is continuous increase in demand for Hetbahn is actually growing 20%. So we feel that there's also a lot of potential for HMR to take up a large portion of that dining-at-home demand. So we want to introduce more differentiated products so that we can really win the hearts of working moms as well as moms at home. And we feel that we can't expect to see further growth for HMR in the future.

We'll take the next question, and the next question is from Ms. Kim Hyeeun from Morgan Stanley.

I have 2 questions -- actually, 3 questions. So regarding your midterm strategy, I mean, I've heard some answers from the previous question. So when we think about net borrowings, we would like to -- I mean, there has been efforts to reduce your size of net borrowings. But now that we would be investing more if that's the case, can we assume that that's the case? I mean, if you're going to spend as much as your EBITDA, on one hand, we feel that we have to pay taxes, and you have to think about current operations as well. So that means there will be continuous increase in net borrowings. So I want to know about your take on how you're going to manage the size of your net borrowings? That's my first question. And the second question is, as for price increases in Korea, we're seeing a lot of that happening in Korea. So from your perspective, considering the rise in commodity prices, is this a cycle where we're going to see continuous increase in prices? Or are you near the end? And we feel that there's not going to be further price increases because now it has become stabilized. And as to my third question. Feed & Care, their profitability has been quite volatile somewhat. And in your midterm strategy, you talked about how you're going to ensure fundamental competitiveness and improving your profit structure. But for -- if you look at the high-margin volatility in Feed & Care, would like to know about your plans and how you can effectively hedge against such a huge volatility in profitability for Feed & Care. So these are my 3 questions.

So regarding your first question on our financial structure as well as our investment strategy. So in the past, when we made investments, we have always been open to new opportunities. And for our existing business, whether it be expanding globally or increasing our market position in the existing business, as well as for those areas for R&D competency, we have always considered organic and inorganic investments. In light of our midterm strategy and especially for securing new growth engine, such as Red Bio, White Bio or plant-based, we have been open to investments in these new areas. But when we execute these merger and acquisitions, we would always take into account cash flow and financial soundness to make sure that it does not hurt our financial soundness, and that's going to be factored into our investment decisions. As for our net borrowings, it's quite high, but by the end of the year, we want to lower that to about $5.3 trillion near towards the end. So we would make investments. But even if we undertake these investments, we will make sure that we will continuously manage our financial soundness and be very disciplined in our future investment decisions. As for the price increase cycle, which is your second question. I mean, considering ingredient costs and commodity costs, there is rising cost burdens. So those products that are subject to such increases, especially for processed food, we have undertaken price increases throughout the year, and to mitigate such burden. And in the future, of course -- I mean, you mentioned a cycle, but it's not necessarily a cycle. But if we are going to see continuous increase in commodity -- increasing ingredient prices than, of course, we would be considering price increase as a way for us to hedge against these rising inflationary pressures. Especially for grain cost, in the third quarter, there has been sharp increase, and we are expecting further increase in the fourth quarter. So if that's the case, we would also be looking into how we can streamline our costs. And if that's not going to be enough, of course, we would be open to considering revising our prices to mitigate against such pressures. And as for the volatility and profitability for Feed & Care, in order to ensure high profitability for Feed, we would be managing our spread, and we would be ensuring stable volume with expanded lineup. And third, we would be expanding -- diversifying our portfolio, centering on high-margin products such as Aqua. So for Feed, we would be able to maintain profitable structure. And as for livestock, based on our biosecurity competency, we would like to enhance our productivity. And ahead of low livestock prices, we would be better prepared in the downstream so that we would be able to hedge against such volatility and profitability. And for future survival, we would like to continuously strengthen our technology competency to enter new business areas like animal health care to strengthen our business structure and create profitability along the way.

I will take the next question. And the next question is Paul Hwang from Citi Securities.

I am Paul Hwang from Citi. So I have 4 questions. First is regarding the scaling up of GSPs. Up until now, we feel that we have seen strong performance for Mandu. As for the other 5 GSPs other than GSPs compared to our prior attempts with Mandu, there would be some bottlenecks given the attributes of these products -- attributes of these products. So we would like to know about what kind of bottlenecks there are and how you're going to address these bottlenecks for non Mandu GSPs? And as for the second question, in expanding global territories for Food, you talked about entering into white spaces. And if you think about the U.S., China, Europe and Asia -- Southeast Asia, these are high -- strong sources of revenues. So compared to your resources that go into there, do you really need -- do you see the need to dilute your resources in other areas? And so why not just focus on areas that you have been already doing well. So that's -- we'd like to know about your perspective on that and how serious you are about entering markets that you have not entered before. And third, regarding Feed & Care, you talked about entering new business. But if you look at -- in the past at one point, we felt that Feed & Care had been defined as noncore business, and you had, at one point, considered downsizing, so does this mean that you have switched that stance and you would be committed to further nurturing F&C. So I'd like to know about your perspectives, whether there are substantial changes and how you see F&C business. And as for fourth, regarding your acquisition for Batavia, we want to know about how you approach the valuation and what kind of synergy you are expecting from that? And we would like to know about the timing of when this deal will be crystallized.

As for your first question regarding GSPs, so for Mandu, since 2008, we have worked on this for the past 10 years and has really scaled up in the global scale -- into a global scale as well. So for all 6 GSPs, I mean, we want to prevent trials and errors that we have experienced with Mandu, and we feel that the most Korean is the most global. Based on that philosophy, we would like to focus a lot of our R&D resources on these GSPs. And to accelerate or speed up these efforts, we have signed the marketing partnership deal with LA Lakers. And in Korea, we have also been -- we have a lot of resources and infrastructure in Korea to test these GSPs here in Korea, and we feel that we would be able to enter into markets that are most fit for each GSP. So we would like to further pursue performance in line with such strategy. And as for expanding global territories -- expanding into global territories, as you have mentioned, based on the strategy of select and focus, we have been looking into the U.S., China, Japan and Vietnam, and we have been driving a lot of efforts there. And even within these countries and expanding business in those countries, it could be an expansion of our existing business territory. And for global scale-up of our business, it's important to expand our presence in these existing countries. But if we are to truly expand K-Food, we have to further strengthen and expand potential markets, and that would be dubbed as expanding global territories. So our first strategy is to focus on countries that we really want to focus on. And, of course, we would be making small and big investments there. But for -- but we would not be necessarily focused on existing markets where we'll be looking into Canada or Mexico or other countries in the Americas, where we can leverage the platform as well as touch points of our U.S. business in Schwan. So these would be the areas where we want to further focus on. As for as countries in Southeast Asia, in addition to Vietnam, we want to think about leveraging Vietnam as a hub to pursue what is called global-to-global business. So Vietnam could become a hub for Southeast Asia and expand to adjacent countries from that point onwards. So that kind of business model is what we envision as we move forward. So just as you mentioned, in order to expand into global territories, it doesn't necessarily mean that we would be making massive investments, but rather we would be taking these strategic approaches.

And I'm [ Ansan Jung ] in charge of finance strategy. And here, it may not be -- we can't definitively say which business is core and noncore. We feel that this may not be the time to do so. And for most companies -- just like most companies, we are -- and for these not definitive areas regarding what businesses are core and what businesses are not core, they're always open to flexible considerations and is always happening as we speak. So as mentioned in previous Q&As, in terms of net borrowing size, I mean, there was a question on the size of the net borrowings. And I mean, with increasing EBITDA, we feel that we also -- the net borrowings that would help us ensure financial soundness is also increasing accordingly. But for net debt to EBITDA, if we think about financial soundness indicator, of course, we have to continuously manage that and keep it within certain level. But at the same time, we also have to continuously commit ourselves to future investments. The fact that we're going to do so is, is I'm sure, in line with what we have done in the past as well. So you would know what our future course would be in line with our past track. And as for Batavia acquisition, you asked about its valuation. So the corporate value for Batavia -- as well as we want to expand in CDMO in CGT. So we would be looking into the company's potential core competency as well as the market potential. So we've looked into similar deals, and that's how we have come over with evaluation for Batavia. And as for CGT CDMO is an emerging and attractive business, and we have factored that into our latest valuation. So for 2020, in sales in Korean won, it's about KRW 30.9 billion. And for the 3-year annual effort, it has been growing 20% and this year, we are expecting continuous growth. And just to add from financial strategy, when -- as you have seen from our announcement of midterm strategy, in pursuing new business we have to think about partnership as well as approaching the FTE market in another option. We are also open to these kinds of options as well. In the past, if we relied just on net borrowings, we are looking for open innovation in how we fund our future investment. I'm sure you have figured that out from our -- the media coverage on our future midterm strategy. So that's what I would like -- that's one thing I'd like to add to the previous comments.

I will now take the next question. Next question is coming from Mr. Jungwook Kim from Meritz Securities.

So I have 2 questions -- or 3 questions. So looking into the past, we've seen the lysine, HMR and then there we have generated meaningful -- you have generated meaningful growth and they have been there to solidify your market presence, and so we're talking about the growth in the Red Bio. So could you actually share what your criteria to define the growth are? And also, second question is on the Korean market. And what's your forecast for HMR? And I think there is a stiffer competition for marketing activities with leading with COVID era. And the third, I think you did great for this quarter in terms of margins. And I think that, that could actually give you pressure of next year's performance. And what is -- do you think at the margin of 12%, that is a manageable level? Do you think you can actually reproduce that performance the next year? And then for Bio, what's your thoughts for next year to Bio your business in terms of the operating profit margin.

So let us first answer your second question on the Korean business and what our thoughts are for HMR market in Korea. And with COVID measure, we believe that the HMR market will continue to grow, and then we're pretty closely monitoring the market and the latest trends. And then regarding your comment on the stiffer competition. We have been focusing on the market share in the past, but we're looking into more of a quality growth, more solid growth. So we are trying to generate meaningful market share growth. So for this year, even though there was a COVID impact last year, despite the pre-COVID era compared to 2019 per se, we believe that you know that we are seeing good improvement in profitability. So as we continue to do so, we actually see our market shares improving. So next year, we're going to continue the current upwards to really effectively respond to market changes. And on your question on Bio operating profit margin, prepurchased ingredients -- and this actually helped us a lot to achieve a remarkable OP margin. So continue this momentum. We want to develop additional customers, and we are trying to develop a new sources of profit. So we still have to check at what level we can achieve it, but we are actually building a strategy to continue the current momentum for growth. And regarding your Red Bio question, so we recently acquired ChunLab, and we entered this previously white space of new drugs. And with the Batavia acquisition, we now enter the space of a CDMO. So compared to manufacturing, we believe that there could be some lead time to see tangible performance or result of these acquisition deals. So we will see what we can do to create a synergy. And so we believe that there will be some meaningful results of these acquisition deals and then this line of decision-making. And regarding KPI or criteria to define success, our growth in Bio and Red Bio. So we are looking into a potential pipeline of new drugs and then especially for CDMO viral vector vaccine, the manufacturing or vector manufacturing, these are areas where we have a specialty in. And we are actually seeing our own growth in this area. And I think we will have to see at what pace we're going to continue our growth in CGT CDMO. There are no pending questions. So due to time constraints, we will wrap up today's Q&A. With that, we would like to conclude today's conference call. Thank you very much [Statements in English on this transcript were spoken by an interpreter present on the live call.]