CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

Ladies and gentlemen, I am Jun Seong, Head of IR Team and Finance Strategy. We will now begin the Q1 2022 business results report for CJ Cheiljedang. Let me remind you that Korean to English simultaneous interpretation will be provided for foreign investors. Let me first introduce CJ team. We have Mr. Kang Kyoung Suk, Head of Finance Strategy; Mr. [indiscernible], Head of Finance Planning; Mr. [ Kim Jung-Ho ], Head of Food Korea Business Management; Mr. Cho Jin-Man, Head of Food Global Business Management; Mr. Hwan Jung Yoon, Head of Bio Business Management; and Mr. [indiscernible], Head of Feed & Care Business Management. Mr. Kang will first walk you through the business results followed by sharing our progress on key strategy execution and outlook by respective presenters. We will then move on to Q&A afterwards.

Ladies and gentlemen, I am Kang Kyoung Suk, Head of Finance Strategy. Today's agenda includes Q1 highlights, earnings analysis by business units, key indicator analysis, progress on key strategy execution followed by Q2 outlook. Let us now flip to Page 5. In Q1 of 2022, CJCJ achieved 18% growth in sales year-over-year and 7% growth in OP. Despite a decline in margin for food due to rising input costs, sales increased 13%, posting robust growth and buoyed by expansion in K-Food, Food's overseas sales continued 2-digit growth. And thanks to a favorable market, Bio also continued high growth with differentiated competency in specialty products, diversified global presence and interoperable production. Feed & Care also turned to surplus with recovery in livestock prices and improved productivity enabled by biosecurity. Next page, please. Let's look at Q1 company-wide results, excluding CJ Logistics. So Food focused on growing channels, both in and out of Korea in line with changing consumer trends and Bio actively led to market in Q1 as our results, sales grew 18% compared to the same period last year to KRW 4.3186 trillion. And thanks to Bio's market dominance and robust sales in high-margin regions operating profit grew 7% compared to the same period last year to KRW 364.9 billion. For net profit with increase in operating profit and improvement in nonoperating income, it grew 6% compared to the same period last year to KRW 222.2 billion. When including CJ Logistics, sales grew 13% year-over-year to KRW 6.9799 trillion and KRW 435.7 billion in operating profit. Let us now look -- turn to Page 8. So let's look at performance of each business units. First up is Food. Our sales grew 13% year-over-year. In Korea, we focused on growing channels and accelerated growth, led by solid market leadership and new mega products. As a result, sales in Korea grew 12% year-over-year to KRW 1.433 trillion. For Food overseas, we've continued growth led by global strategic products or GSPs and focus on growing channels of each country, sales grew 15% Y-o-Y to KRW 1.1765 trillion. Operating profit declined 4% year-over-year to KRW 169.7 billion. In Korea, there has been continued efforts to improve operating profits across all value chains with cost-effective execution and pricing actions for some products to alleviate cost burden. And in overseas business, we also try to minimize cost burden arising from intensifying inflation with increase in sales volume, pricing actions for key products and cost structure improvement efforts. If you look at the bar graph on the next page, OP margin in Q1 was 6.8% when excluding Schwan's PPA, and 6.5% when including the PPA. Next is more details on Food sales in Korea on Page 10. Product-wise, core products, namely Hetbahn, processed meat, DASIDA and HMR have seen continued growth, along with accelerated growth in new products such as white meat, grilled fish, Chinese cuisine and PlanTable. Channel wise, we executed flexible strategy by channel in response to changing consumer trends and expanded consumer experience by channel. We also focused on responding to demand and reopening channels. Q1 sales and Food sales with Korea stands at KRW 1.433 trillion. And now on to Page 11 with more details on overseas business. In the U.S., we focused on scaling up GSPs through Bibigo platform and driving growth led by Asian category. As a result, we grew 14% compared to the same period last year to KRW 915.3 billion. For Asia Pacific and Europe, we continued growth, thanks to expanded sales of K-Food and growing channels. China saw a 15% growth, thanks to positive sales of K-Foods mainly Mandu and chicken and continued growth at online channel. And Japan achieved 31% growth on the back of leading market presence of core products and brands, namely Micho and Mandu, Europe also grew 36%. For the region as a whole, it grew 18% compared to the same period last year to KRW 261.2 billion. Q1 food overseas sales stands at KRW1.1765 trillion. Next is Bio. Amid rising prices of raw materials, we passed on cost burden through prices of key products enabled by market leadership, and we maximize profits by increasing sales of amino acids for fees such as lysine in high-margin regions. Sales grew 39% year-over-year to KRW 1.0828 trillion and OP grew 128% from the same period last year with quarterly operating profit standing at KRW 175.8 billion. Product wise in ANH, we focused on sales of key amino acids such as lysine in high-priced regions and enabled operation optimized for each region, resulting in greater profitability. Technical marketing and special amino acid also has greater contribution to performance. For HNH, we ensure profitability for nuclear tides through long-term contracts with key accounts. And in light of surging demand for TasteNrich from key accounts, we worked hard to expand supply. With continuous growth in demand for sports nutrition, we have also seen increase in both price and volume for arginine. And for Selecta and others, we took pricing actions and expanded volume based on market dominance in SPC in light of strong soybean prices. On the next page, you can see Q1 OP margin at 16.2% with sales of high value-added specialty products accounting for 13% in sales, maintaining 2-digit trends. And next, on to Feed & Care. With surge in grain prices have increased in feed price, sales grew in a majority of their regions, but rising commodity prices and high base effect of Vietnamese hog prices last year resulted in OP decline. If you look at sales, it grew 7% year-over-year to KRW 626.3 billion, with increase in feed price and continuous expansion of high value-added Aqua volume, feed sales rose, while livestock sales flattened due to a declining spread of Vietnamese hog. For operating profits, it declined by 78% year-over-year to KRW 19.4 billion, largely due to high base effect of Vietnam's hog prices prior year and rise in costs, including feed. Despite decline year-over-year, it turned to surplus Q-o-Q with recovery in demand and hog prices since Q4 of 2021. Product lines for feed, we took proactive pricing actions with rising commodity prices. We also experienced improved profitability with expanded sales of Aqua feed. For livestock, rising feed prices and declining hog prices dampened profitability while production continued to improve with affected biosecurity performance. In Indonesia, despite increasing livestock costs, the government's culling program continued contributing to maintaining high chicken price and hence, strong sales. Now let's now turn to the performance of CJ Logistics on Page 16. With improved market conditions both in and out of Korea and continue to enhance profitability, CJ Logistics achieved growth in both sales and OP. Q1 sales gained 6% year-over-year to KRW 2.857 trillion and OP grew 57% year-over-year to KRW 75.7 billion. And on Page 19, you can see SG&A nonoperating income expenses excluding CJ Logistics. When you look at SG&A, labor costs increased by KRW 33.8 billion in transportation cost by KRW 42.5 billion. With cost-effective execution of resources, however, we achieved SG&A to sales ratio of 22.4%, down by 0.7 percentage points from the prior year. Nonoperating income expense improved by KRW 7.3 billion year-over-year to minus KRW 48 billion. For Page 20, when including CJ Logistics, SG&A nonoperating income expenses are largely affected by performance CJCJ. So I'll skip the details. Next, moving on to key issues and outlook. On Page 22, Food business in Korea.

Good afternoon. This is Chang Jong Kim, Korea Division's Business Management. As we enter the endemic stage, consumption trends will change with the recovery of the out-of-the-home sector. According to data of Shinhan Card, the out-of-home market sales in the Q4 2021 was KRW 29.6 trillion, which is already at a pre-COVID levels. The offline segments sales is lower than pre-COVID levels, but the sales of the Food Delivery segment has grown by fourfold, heading the recovery of the out-of-home segment. The endemic phase will drive up the total out-of-home sales, but a significant trade-off between offline and delivery segments are expected. However, due to the rise of commodity prices and other costs, the price of processed foods rose 8.5% after COVID, and prices of out-of-home foods were also up by 8.7%, which all will impact consumption trends. We'll continue to monitor change in consumption trends in Korea and focus on growing channels to keep up with our outstanding growth momentum. For B2B, we'll strategically respond by providing customized products and solutions to our key clients while adding to our B2B brand to create brand equity and invigorating in-flight meals and presence and duty-free shops to deliver sales that outperforms the growth of the B2B segment. Online and CVS sales for the past 3 years have surpassed the growth of each segment sales, especially CVS is expected to continue its growth in the endemic stage, thanks to more outdoor activities, and despite, we'll continue to develop CVS exclusive products and strengthen strategic partnerships with key clients. And next up is the U.S. Foods business.

Good afternoon. This is Jin-Man Cho, Global Business Management. For pizza with our premiumization efforts represented by fully loaded pizza, Red Baron's market share stood at 16.8%, 1.2% growth year-on-year. Mandu in the first 12 weeks of this year has seen sales growth of 49% in the grocery channel, including Pagoda sales. CJ Food's Mandu sales, including Bibigo, grew 70%. And Schwan's Food Service business achieved a 49% sales growth in Q1. Mandu apparently is contributing to our broader presence and the catering and restaurant channels. Besides Mandu, all of our global strategic products continue to grow in the U.S. Processed rise, thanks to higher sales of Hetbahn and fried rice, we grew 66% at Korean won and our new multigrain rice offerings will further add to the pace of the growth. Our multigrain precooked rice products contain 2 or more types of grains with a hint of salt and oils for flavors that are cater to local consumers' pallets. There are 4 flavors available, brown rice, jasmin, quinoa and wild rice. Our differentiated R&D and manufacturing technologies to allow optimal heat treatment and moisture control to deliver the soft texture and great flavors, and they've been favorably evaluated in a consumer blind test. The pre-cooked rice market in the U.S. is expected to be worth more than KRW 1 trillion by 2025 and demand for premium rice will also grow. To take advantage of this trend, we'll continue to train our focus on the growth of the Hetbahn in overseas markets with existing lineups as well as new products. Like rice, chicken and fried rice, thanks to higher consumer penetration ACV grew 88% in dollar sales in Q1. Now moving on to key ESG updates. We're working on different initiatives on multiple fronts to realize our goal of carbon neutrality and zero waste by 2050. One of them is building a facility to drive shift to biomass fields at Korea's largest food smart factory CJ Blossom Campus. As the first in Korea, we apply gastification to burn wood materials using low-temperature pyrolysis to convert gases into electricity and steam, which is at the core of a low carbon clean energy system. The groundbreaking is slotted for 2023 and the start-up of this facility in 2025. The annual GHG reduction is expected to be at list of 40,000 tonnes with this facility. There are other initiatives focused on environment. We reclaim post-consumer Hetbahn bowls as part of the campaign to recycle plastics. We directly collect the post-consumer Hetbahn plastic bowls that are recycled, that often go to waste and reprocess them into trays for holiday gift sets and sustainable pallets for logistics. We've recently launched an upcycled footprint, Excycle and its first product, Excycle Basak Chip. It's made of broken rice and okara both side streams generated during manufacturing processes of Hetbahn and Happy Bean. The products contributed not only to reducing food loss and waste but also invigorating resource circulation as it recycles PET bottles for packaging. The debit is through Wadiz's crowdfunding platform in Korea and distribution will kick up in the second half of this year. We'll now move on to the Q2 outlook. In Korea, on-trend product expansion in growing channels and pricing normalization will further reinforce sales growth, but inflationary pressure is here to stay. Therefore, the impact of higher commodity prices and other costs will continue. We'll act quickly to respond to change in consumption trends in the endemic phase reinforce total cost management, including profit structure and transformation as well as growth engines for future growth such as health, food and alternative meat to offset the external challenges. In the overseas market, we'll take advantage of the reopening of the economy and a broader Asian menu portfolio to expand the presence in B2B, expand velocity and distribution of K-Food in the grocery channel debit new premium pizza and take pricing actions to retain the growth momentum. In Japan, we expect to further diversify the product types and channels for Micho as the peak seasonal years, while Bibigo, Mandu sales is likely to increase. In China, we'll focus on Gen Z for brand measures matters for broader occasions for K-Food and solidify presence in online platforms such as TikTok to support growth. For Bio, Animal Nutrition will have to cope with continued inflation in greater and transportation costs, but our presence in overseas markets and flexible manufacturing will allow agile operations by region and price leadership, which will help solid performance. The Human Nutrition business due to lockdowns in China may be faced with lower demand, but long-term contracts with large-scale counts will result in gradual recovery of demand for nucleotide and the sales growth of solutions that use premium ingredients like TasteNRich, which will together help the business grow. Feed & Care will be affected by the higher port price than that of the same period last year, but a series of pricing actions that incorporate grain price inflation and a higher share of high-profit fee offerings and the rebound of reading prices with the recovery of the demand in Southeast Asian states such as Vietnam are likely to result in an improved profit in Q2. And so we expect to record the 2-digit growth and the OP of 8%. And that's the end of the prepared presentation. We'll now take questions. Anything Korean will be translated simultaneously and Q&A and English will be translated consecutively.

We will now begin Q&A session. [Operator Instructions] We have the first question from Merit Securities. Mr. Kim Jungwook from Meritz Securities.

Thank you very much for the presentation. In Process Foods, it's quite impressive how the sales has grown. So if we think about -- if we divide it into volume and pricing actions, I want to know about the mix. And we want to know whether such high growth can continue into the second quarter and the next? And my second question is, I mean, there's going to be increasing burden from commodity price inflation. So if you think about the outlook for the second half of the year, we would like to know where we would be able to see less burden from rising input costs? So we would like to hear more from you on that. And finally, Bio overseas has shown very good results, and I think the market has been very good. So I think it was largely affected by that. So after the second quarter, we would like to know whether there's any potential for changes in market condition? If you think about the capacity of competitors, we would like to know about your outlook for the second quarter and the third quarter, depending on how much capacity is picked up by competitors?

So first on the -- I mean, on the first question regarding the growth outlook of Processed Food. In the first quarter, if you look at Korea sales, it grew 11%. So all in all, if we break down where the growth came from, 1/3 has come from volume increase and 2/3 came from pricing actions. So that's how we can divide up the divide up the sales growth. And if we divide it between FI, food ingredients and processed food, we feel that 30% of the increase came from pricing actions for Processed Food. And for food ingredients, there has been a lot of commodity price increase. So a lot of it came from pricing actions for food ingredients. So of course, there's going to be persisting input cost burden. So we would be translating that all of that into pricing actions. So in the future, we feel that there's going to be a higher contribution of pricing actions in total sales increase in the remainder of the year. And in terms of commodity or ingredient prices, so we use a lot of raw sugar in our products. And maybe in India or Thailand, there had been stable production. So the prices came down a bit. But because of the Ukraine crisis, there has been increase in oil prices and with stronger hail the prices are going up again. So for grains, because of the Ukraine crisis, we are expecting concerns over the supply. So the price is going to shoot up. So in the second quarter, adding on to these risk plus the climate risk in South America, we feel that the price is going to continuously increase. But amid potential recession in the global economy with concerns over inflation in the U.S., there's concerns over stronger dollar. So there could be some that could somewhat curve the increase in commodity prices. So up until the third quarter, of course, the prices are likely to go up. And after the fourth quarter, we feel that there would be other variables at play to play. Ahead of such increase in ingredients or commodity prices, we are trying to develop alternative ingredients and diversify suppliers of these major ingredients. We're trying to leverage hedging strategies, including options. And of course, we are trying to raise productivity across all value chains and making sure that we can improve our cost structure with total cost management, including SG&A. And as for the question on Bio business, the amino acids, including lysine, the market has been very good and that -- I mean, of course, the numbers speak for itself. But rather than China, competitors from China, we have presence in North America and Europe. And with increasing grain prices and ocean freight increases, we have been able to leverage our market presence with diversified sites across the world. So in the third quarter, we feel that based on good market conditions, even when Chinese competitors raise their utilization rate and expand their exports based on our diversified presence across the world and if we can maintain our numbers, we feel that even in the third quarter, we will not be heavily affected by changes in market conditions. So we're not really anticipating that. And we feel that the possibility of that happening is quite low at this point in time.

[Operator Instructions] The next question is from Mr. Park from Kiwoom Securities.

So just like you mentioned, there are concerns over continuous commodity price inflation. So in Processed Food, we want to know whether you need additional pricing actions for Processed Food? And if needed, do you think you can actually implement on the pricing actions for Processed Food? And my second question is for Bio, usually, the performance is -- I mean, it's not as much better in the first half than the second half, but you mentioned that it's going to be better in the -- it's going to be okay in the second half. So we would like to hear more about the outlook for the second half of the year for Bio.

So if you look at the -- as we have seen from the first quarter performance, the operating profit in Food has declined year-over-year and -- that's largely because of the increase in input costs. So that was one of the main reasons why there has a decline in operating profit. So we will do everything we can to make sure that we can be very cost effective in terms of purchasing. And we will be continuously engaging in cost reduction efforts. But at the same time, there would be inevitable cases where we would have to take additional pricing actions. And as for your question on Bio business, the performance has been very good for Bio. So regarding the annual guidance -- so that's how we interpret your question. So regarding the annual guidance after we give out the official guidance earlier this year -- earlier any year, we don't really revise that throughout the year, but if we look at the performance in the first quarter as well as the outlook for the second half, I think you can make your own estimations regarding how the business will unfold for the rest of the year.

Next question is coming from Ms. [indiscernible] from [ Patient Securities ].

Thank you for your presentation as well. And we see that limited growth -- top line growth of Schwan's. So could you actually elaborate further on the top line growth, estimated growth of the top line of our Q1 of Schwan's? And OP margin has improved a little. And then does that come from the Korea? Or does that come from overseas markets?

So regarding the question on the Schwan's top line. Schwan's have the home service business unit and -- but consumer brand and outside businesses, they have been recording double-digit growth. But home service has been carved out, but it actually delivers to consumers' homes directly, but because there has been a COVID impact and also a decline in demand. So that actually led to decline in performance locally, but the food service and consumer brands of Schwan's. Food service, we -- it's B2B pretty much, for example, K-12 because we are seeing the recovery of food service demand and then also there has been a higher growth of Mandu. So we saw 30% growth of food service business. And then B2C or consumer brands, Mandu, Chicken and fried rice, K-Foods, distribution and velocity have been on the rise, and it also pizzas sales also has grown by 10%. So for Q2, grocery channel sales -- K-Foods sales will grow in the grocery channel. And then also with the recovery of the economy and reopening of the economy, we expect to see higher sales to Asian food and B2B. So we see that will -- we'll continue to see growth and upward trends overall. And regarding operating margin of food. So we saw most of the decline comes from Korea business, especially food ingredients due to the inflation of commodity prices.

Next question comes from Ms. Kim Hyeeun from Morgan Stanley.

I have 3 questions. One is regarding Bio. And the Bio OP was very impressive. So if things continue like this, and we see that things are looking up and things are looking rosy for the remainder of this year, but you have a different offerings, different products, nucleotide or lysines. So could you actually elaborate on the contribution of these different products to the growth? And then also second, on Feed & Care and hog prices in Vietnam that are going up. So under the current circumstances, do you -- would you think that performance will improve further in the next quarter and the remainder of this year? And then third, and the borrowings actually -- net borrowing has actually exceeded about the KRW 6 trillion. So what are your controls and what are your measures to actually have that under control?

On your first question on Bio, question had to do with the contribution of different products to our operating profit. So in the first quarter, operating profit grew year-on-year, but the lysines mainly led the profit and soybean oil and then also [indiscernible] nucleotide and TasteNRich, they also contributed to the growth of our operating profit. And on your second question, commodity price increase means that our reading or cost of COGM, will also grow. So we believe that the hog prices will go up as well. So we believe that profitability in Vietnam will grow further into the second quarter. And regarding the question on net growing -- net borrowing. So net borrowing by the end of the first quarter was at KRW 6 trillion. So that is about KRW 700 billion increase. So that has to do with the geopolitical crisis, but that is due to the increase in working capital and inventory-related expenses. So to respond to potential external shocks or factors, so we have our measures set in place. So we believe that we are ready to some degree, and then we will try to keep our financial -- finance solid and sound.

So we have Mr. Park Sang-Jun again from Kiwoom Securities.

I have 2 additional questions. First has to do with Schwan's. When you talked about Schwan's, you talked about food service and consumer brands as well as home service. we would like -- so you mentioned that there's discrepancies in sales growth depending on different business units. So we would like to know how the differences in sales growth rate translate into their profitability? And my second question is for Food overseas, I hear that there would be expanded lines. So regarding the capacity line -- time line, we would like you to give us a short update on that.

So for home service of Schwan's, when we acquired Schwan's in the past, we decided to carve home service. So that's carved out from our transactions with Schwan's. So our business is largely relevant to food service and consumer brands in terms of sales and production. And as for home service it's just being focusing on supply to home service. So we do not have margin calculated here. We're just manufacturing and supplying to home service. So there is minimal impact from any difference in -- coming from home service to our profitability as Schwan's. And as for the capacity expansion plan for Food overseas, just to give you a brief overview. So right now, one of the key growth drivers of our business overseas or K-Food or what is known as GSP or global strategic products. And with continued high growth of Mandu, as you know, in the U.S. and the West, we have our plant in Beaumont, and we would be implementing an innovative line of 3-tier Mandu line. And it's going to go into operation at the end of the year. So that's our target. And as in Vietnam, we -- in order to tap the Halal market, we are looking into ways to make Halal-certified K-Food. And that's what has been widely covered as Kizuna plant in the media, which is solely in charge of making K-Food in Vietnam, including Kimchi and Mandu.

Due to timing constraints, we will just have one more question. [Operator Instructions] And the next question is from Mr. Kim Jungwook of Meritz Securities.

So now that linking through the handouts, so there has been a lot of increase -- you mentioned there's an increase in labor costs and transportation costs. Please elaborate more on that increase. And we would like to know whether that's going to continue into other quarter -- in the following quarters as well. And additionally, for White Bio, we would like to -- I would appreciate if you can share us any updates on White Bio. And as for your cost outlook, you mentioned that there's going to be some burden on profitability for Food business. So are we going to expect it until the third quarter? We would like to hear about your take on that.

So regarding the first question, labor costs and transportation costs and SG&A. So for labor costs compared to the same period last year, there has been certain increase. But if we look at the total -- share of total mix, it has actually gone down by about 0.4 percentage points compared to the same period last year. So if you look at the -- why there has been increase in labor costs, there has been basic salary increase, and there has been some revisions through our existing compensation scheme. And we've also had Bioscience and Wellcare. So we've had acquisition of these new entities. And as for Schwan's, due to continued COVID 19, there has been additional labor costs arising from that. So of course, this is likely to persist for a while. But by reducing SG&A, just as we have been able to reduce SG&A this quarter, we will try our best to make sure that we can be more cost-effective and further reduce SG&A. And as for transportation costs, there has been slight increase, but this is actually a trend that has been witnessed from past year with the sky rocketing ocean freight charges as well as the increase in freight cost in Bio. So they have attributed to such rise in transportation costs. So we feel that Bio has been taking pricing actions accordingly. So it's not going to be much of a burden. And as for the second question on potential updates on White Bio business. As for White Bio, just as we have mentioned before, we would be going into main production in the first half of the year. That -- there is no setback there. And the products that come out of main production will be tested. So considering that testing period, we feel that sales is going to be generated from the second half of the year. And as for the third question regarding whether the cost burden is likely to persist into the third quarter, as mentioned earlier, we have been looking into green price increases, and we feel that there are going to be factors driving up our cost. But as mentioned earlier in our presentation, we have been making efforts to reduce costs across all value chains. And for inevitable cases, we would be taking additional pricing actions to make sure that we would be able to minimize such burden as much as possible.

With that, without further questions, we will conclude today's conference call. Thank you, everyone, for your time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]