CJ Cheiljedang Corporation (A097950) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining us today. Let us begin the conference call for Q4 2022 earnings report of CJ Cheiljedang. [Operator Instructions] We will now begin CJCJ's presentation.

Ladies and gentlemen, I am Jun Seong, Head of IR team and Finance Strategy. We'll now begin the Q4 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 the CJ team. We have Mr. Kang Kyoung Suk, CFO and Head of Finance Strategy; [ Mr. Kim Jung-Ho ], Head of Food Korea Business Management; [indiscernible], Head of Food Global Business Management; [ Mr. Kim Jung-Hyun ], Head of BIO Business Management; [ Mr. Kim Seung-Pil ], Head of [ F&C ] Business Management; and [ Mr. Hwang Hyun-Joo ], Head of Feeding Care Business Management. Mr. Kang will first walk you through the business results, followed by progress on key strategy execution and outlook by respective presenters. We will then move on to Q&A.

Ladies and gentlemen, I am Kang Kyoung Suk, CFO of CJ Cheiljedang. Today's agenda includes Q4 highlights, earnings analysis by business units, the indicator analysis and progress on key strategy execution followed by 2023 outlook. Let's now flip to Page 5. In 2022, CJ Cheiljedang achieved record high results, with sales growth of 19% and OP growth of 8%. While sales in Q4 grew 15%, however, OP declined by 8%. In Food, thanks to expansion of channels and product lineup in key regions, sales of GSPs overseas has seen robust growth. With #1 market share in Mandu in U.S. grocery and #2 market share in pizza, we're continuing our growth trajectory and market presence. In BIO, we are seeing continued growth and increase in mix of high-margin specialty products thanks to marketing of nutritional balance and functionality claims. With continued management of financial soundness, net debt declined by KRW 600 billion quarter-over-quarter. Next page, please. Let's now look at Q4 results, excluding CJ Logistics. Thanks to consistent growth across all business units, with Food at 15% BIO at 15% and F&C at 19%, CJCJ achieved sales of KRW 4.7267 trillion, up 15.5% versus Q4 of 2021. Despite rising cost pressure on Food Korea and F&C, increasing OP of Food Global has offset the impact. As a result, OP stands at KRW 123.2 billion, down 8.3% from Q4 of 2021. For net profit, despite improvement in nonoperating balance, net profit declined by 91% to KRW 7 billion due to base impact of tax returns in Q4 of last year. When including CJ Logistics, sales grew 9% year-over-year to KRW 7.5711 trillion and OP stands at KRW 240.6 billion. Next to Page 9. Let's look at the performance of each business unit. First up, Food. The sales grew 15% year-over-year. In Korea, due to decline in demand and rising fixed cost, we're trying to offset declining sales from weak demand by introducing core and new products that meet diverse needs such as restaurant-quality and value products. As a result, sales in Korea grew 13% year-over-year to KRW 1.4269 trillion. For sales overseas, we expanded global strategic products or GSPs in terms of channels and lineup in key markets such as the U.S. and China. We also came up with stronger portfolio of products in line with local culinary culture and changing consumer trends of each market. With continued 2-digit growth, overseas sales grew 17% year-over-year to KRW 1.4057 trillion. Operating profit grew 24% year-over-year to KRW 77.1 billion. In Korea, despite efforts to streamline cost across value chain and refine management system to defend margin, rising input costs due to grain purchases at peak and impact from unfavorable foreign exchange rate undermines profits. But overseas, along with continued improvement in profitability of the U.S. business, expanded sales of core products and cost streamlining efforts contributed to enhancing profitability despite inflationary pressures. If you look at the bar graph on the next page, OP margin in Q4 was 3%, excluding Schwan's PPA, and 2.7% when including the PPA. Next, just more details on Food sales in Korea. So please look at Page 11. Product-wise, we expanded core and new products that meet consumer trends and channel-wise, we saw continued growth in core channels such as digital B2B and convenience stores. As a result, Q4 sales in Korea stood at KRW 1.4269 trillion. Next, we have more details on overseas sales. In the U.S., we focused on continued sales growth of GSPs through bibigo platform and enhanced market share of pizza and Mandu or dumplings. As a result, we grew 18% compared to Q4 of 2021 to KRW 1.1248 trillion. In Asia Pacific and Europe, we continued growth through K-food category and channel expansion, resulting in sales of KRW 280.9 billion, up 12% from Q4 of 2021. Next is BIO on Page 13. So for BIO, against the backdrop of an unfavorable amino acid market, we focused on expanding sales of high-margin products. Despite an unfavorable market, sales grew 15% year-over-year, thanks to impact of foreign exchange rate and expanded sales of specialty products. Due to declining amino acid market and continued cost pressures, OP remained similar to that of last year at KRW 78.3 billion, up 4% year-over-year. Product-wise, in Animal Nutrition & Health or ANH, grain prices fell below their peak and export conditions improved for Chinese competitors, resulting in downward pressure on amino acid price. However, with interchangeable production of lysine lines and increasingly lower use of crude protein, we developed new demand resulting in continued growth of specialty products. For Human Nutrition & Health, re-spread of COVID-19 in China and contraction in consumer sentiment amid global inflation challenged demand for food additives. Nevertheless, we have been able to drive a high-priced market in nucleotides enabled by CJ's market leadership. For Selecta, sales expanded with products that respond to changing SPC markets. Efforts to diversify customers to maintain high soybean oil price resulted in year-over-year growth in sales. If you look at the next slide, Q4 OP margin stands at 6.9% and share of specialty products in sales was 15%, showing a continuous increase. Let us now move on to Feed & Care or F&C. F&C saw top line growth with feed price increase and Vietnam hog price exceeding that of last year. Sales grew 19% year-over-year to KRW 752 billion. However, rising input cost pressure for hog farming in Vietnam and decline in poultry prices in Indonesia resulted in OP deficit of KRW 32.2 billion. For feed, despite input cost pressure amid rising grain prices, OP margin improved by a wider spread from pricing actions. For livestock business, raw material costs such as feed has soared in Vietnam, but recovery in hog prices has been delayed due to slowdown in consumption from an economic downturn. In Indonesia, higher-priced feed prices led to increase in cost of livestock, whereas poultry prices fell due to a decline in poultry consumption. Let's now turn to the performance of CJ Logistics on Page 17. Thanks to a price increase and stable profit structure, CJ Logistics saw growth in profits. Sales in Q4 declined 1% year-over-year to KRW 3.0234 trillion, and OP increased 13% year-over-year to KRW 112.3 billion. Jumping to Page 20, you can see SG&A and nonoperating income expenses, excluding CJ Logistics. For SG&A, transportation cost increased by KRW 46.7 billion due to rising global freight rate amid inflation. Advertising increased by KRW 42.5 billion to boost brand equity of bibigo, but with the efficient resource operation, SG&A to sales remain similar to that of 2021. Nonoperating income and expenses improved by KRW 22.2 billion, coming in at negative KRW 37.7 billion. On Page 21, including CJ Logistics, SG&A and nonoperating income expenses are largely affected by CJ's [indiscernible]. Next is update on key strategies and outlook. First up is Food business unit margin outlook.

Hello. I am [indiscernible], Head of Food Global Business Management. Ingredient price hike in 2022 outweigh the effects of pricing action, resulting a 9% decrease in profit. However, the fall in domestic business profit was offset by strong overseas profit. Margin is expected to recover after second quarter in 2023 through aggressive cost reduction, profit model innovation, continued increase of overseas sales and profit and stabilizing grain price and exchange rate. Considering ingredient input lag and exchange rate, the ingredient prices are peaking from Q4 last year to Q1 this year. Price/cost spread will improve after Q2. CJCJ has proven track record of overcoming profit slumps with profit model innovation. We will innovate profit model with data-driven value chain efficiency improvement, 0 base expense execution and SKU optimization. Overseas sales and profit has been growing continuously since acquiring Schwan's in 2019, with growing pizza and global strategic product sales like Mandu and chicken and thanks to cost efficiency. Global sales has grown from 13% of business to 47% in 2022. Overseas sales will continue to contribute to overall Food BU margin with operating leverage from GSP and key product sales growth. Next is BIO trend and outlook.

Hello, I am [ Kim Jung-Hyun ], Head of BIO Global Business Management. Both positive and negative factors exist. Grain and soybean meal prices bearish and stabilizing, and soybean meal and corn spread will remain solid. Low CP trend in China will bring down soybean meal proportion for Chinese feed. Chinese hog price is expected to reach low point as price fell below hog profitability by their policy baseline. This is expected to rebound as demand climb as China reopens. Logistics costs are expected to come down with downward stabilization of freight charge, but it would also increase export of Chinese feed additive manufacturers. Slightly weak demands are expected for key amino acids like lysine due to bearish soybean meal price. CJCJ will expand high-margin formulation in U.S. and EU and boost manufacturing efficiency via specialty amino acid interchangeable production. Tryptophan demand in China is expected to rebound in first half of 2023. We'll boost margin with strategic pricing and sales expansion. Demand for valine, arginine, isoleucine, histidine and other specialty amino acids are expected to grow with CP reduction trend. In summary, we will strategically respond to weak demand for our key amino acids and offset any margin decrease with tryptophan and specialty amino acids. Now we will go on to our midterm growth driver, performances and trends. Overseas Food first. The Overseas Food is growing rapidly, GSP recording KRW 1.6 trillion in 2022, 50% -- 56% increase year-over-year due to channel and product expansion in key regions such as U.S., China, Japan and Europe. Last year, our Mandu sales exceeded KRW 1 trillion, and KRW 800 billion was from overseas. Overseas sales growth for GSP products are 59% from Mandu, 66% for P-rice, 32% for roll and 163% for chicken. Mandu market share in U.S. mainstream grocery channel is 41%, maintaining #1 position, and pizza's market share stands at 18%, 3 percentage points behind the market leader, narrowing the gap. Let's go on to BIO. In BIO, total sales proportion of specialty products grew to 13% in 2022, recording high year-over-year growth of 49% in sales and 97% in OP. Specialty amino acids like valine, arginine, isoleucine grew 47%. [indiscernible] premium food ingredient grew 136%. White BIO is expanding customer partnership base and application with PHA CPP. We are expanding value chain to include biodegradable compounding. CJ HDC BIOSOL, our JV, completed plant construction in January, where our biodegradable materials using aPHA, PLA and PBAT will be compounded. For Red BIO, CJ BIOSCIENCE gained U.S. FDA approval to conduct Phase I and II clinical trials for CJRB-101, a new drug candidate [ marked ] in the beginning of new drug development journey. Next is update on ESG initiatives. CJCJ has been actively pursuing sustainability out of our 4 future growth engines, CPWS. We've been communicating ESG activities transparently, achieving great milestones. CJCJ has been included in various global ESG indices leading ESG management. We received grade A in MSCI ESG rating for 3 consecutive years, joining the ranks of global players. In 2022, CJCJ became the first player in food industry to receive grade AA. We've been listed on DJSI Asia Pacific Index for 8 consecutive years and FTSE4Good Index under LSE for 4 consecutive years. A representative organization in Korea, the KCGS, has given A grade for 6 consecutive years. Also, we won the President's Award for sustainable management by MOTIE in 2022 and was nominated as 2023 LEAD GROUP by UNGC's Korea Association and the Agent Company of the Year by Fair Trade Commission. We are also accelerating the development of biodegradable material PHA. By blending PHA, a marine biodegradable material, and PLA, an industrial biodegradable plastic, we developed a cosmetic product container for CJ OLIVE YOUNG's WAKEMAKE Water Velvet Vegan Cushion. The container used our aPHA, the only mass-produced aPHA in the world, which was also the first application of its kind. By making cosmetic containers, which is usually not recyclable, with biodegradable materials, we seek to meet the consumers' demand for value consumption. We plan to expand application and market with global companies going forward. Next is 2023 key strategies. We plan to execute detailed strategies by each business to overcome tough environment, secure outstanding competency based on CPWS and advanced business model. Domestic Food business will develop new wellness portfolio with Care Food, PlanTable and convenience category to secure outstanding competency and achieve future growth through innovation. Moreover, we will focus on growing channels such as online B2B and CVS with differentiated product and service competitiveness and strengthen profit structure through total cost management that includes data-driven sales efficiency, purchase optimization, productivity increase and operating price improvement. Also, we will boost resource efficiency by rationalizing SKUs, redesigning zero-based labor costs and advancing management structure-based investment efficiency. Overseas Food will build bibigo brand for GSP. We will focus on meeting local needs based on globalization and create cross-category synergy. In U.S., based on the synergy created by the integration of CJ Foods and Schwan's, we will leverage bibigo brand to drive GSP growth, achieve qualitative growth of pizza and expand to new territories, including Canada, to secure future growth engine. China will expand regional coverage of Mandu, expand frozen portfolio, accelerate growth of K-sauce and aim for a qualitative growth of online channel with platform and product level operation optimization. With Micho's brand power in Japan, we will expand RTD market and enter functional beverage market and expand K-food with healthy Mandu and K-food ready meal. Efforts to expand territory will continue by tapping into new markets such as Australia, Thailand, Indonesia and Malaysia. BIO will differentiate formulation based on diversified regional presence and maximize profit with interchangeable production. We will aim to strengthen brand image based on formulation excellence for feed amino acid and increased demand for specialty products by riding on CP reduction trend and functional claim marketing. Selecta will maximize profit with optimal products in response to market changes. FNT will secure long-term nucleotide contracts in China to respond to uncertainties, expand new demands in Asia Pacific region and expand new customers and product diversification by developing TasteNrich solutions. We will diversify existing nutrition market and gain mid- to long-term momentum with new products and solutions. F&C or Feed & Care will de-market low-profit accounts, reduce fixed costs through workforce restructuring and optimized business model to secure a stable profit model. In order to become an AgTech company, F&C will strive to advance aqua disease control technology and build a digital farm based on ICT. Next is 2023 outlook. So for Domestic Food, high ingredient cost pressure is expected to continue in first quarter, but as input costs stabilize after second quarter, spread will gradually improve. Margin is expected to recover, thanks to profit structure improvements and SKU rationalization. Overseas Food will continue strong growth momentum led by B2B and B2C sales of GSP like Mandu, chicken and P-rice and shelf stable grocery and club channel synergy from integration of U.S. subsidiaries. China will expand to second and third tier cities, thanks to the recovering from pandemic. Sauce and seasoning and Mandu is expected to grow as consumption recover. Japan is expected to grow by expanding Micho small bottle and RTD products and [indiscernible] bibigo sales. BIO will offset deteriorating key amino acid momentum by focusing on high GP region and formulation. Profit decline will be minimized with improving tryptophan market, capacity increase and growing sales of specialty amino acids. As China reopen, restaurants and B2B will bounce back, helping nucleotide sales grow for FNT. TasteNrich will surge by expanding customer base and nutrition products such as FlavorNrich, citrulline and histidine are expected to grow. Feed & Care's margin will recover as grain price stabilize and feed spread improve, market price normalize and as F&C optimize structure to be profit-oriented. In summary, CJCJ performance is expected to face headwinds in the first half due to high ingredient cost, economic recession and base effect of BIO's performance same period last year. However, margin will gradually recover as ingredient costs stabilize, profit structure improve, overseas sales and profit increase, high GP products and specialty products of BIO and FNT strategically expand and as market improve for F&C. 2023 corporate sales is forecasted to increase at mid-single digits, and OP around similar level as prior year. That is all we have prepared for today. We will now begin our Q&A session. One announcement before we go on. Simultaneous interpretation will be provided for Korean questions, but questions in English will be consecutively translated. Also, please speak slowly for the interpreters.

[Operator Instructions] We have Mr. Park Sang-Jun.

I have 3 questions. The first, last year, there had been one-off incentives last year. So there has been some base effect from that. So we would like to know whether there's a similar one-off effect for the fourth quarter of this year as well. And the second question is in Food Korea compared to cost increases. There has been pricing increases. So for key products, do you also have plans for further price increases? Can you share us your plans? And for Food, regarding the intensity of margin improvement, if you look at year round, how much margin improvement are you expecting? And finally, for Food Global, so we may have new lines or new plants. I mean, I want to know what kind of new lines or plants would be activated this year as well as what kind of new CapEx investments would be planned for this year. So if you can share us the details of that, I would very much appreciate it.

Right. So for the first question, regarding the impact of one-off incentive for 2022. So there has been one-off expenses, but the impact is not as big, and there has been some inventory-related costs. So that could be counted as one-off expenses. So for Food Korea, during price peak seasons, we had the grain purchases then, and there has been the foreign exchange impact, so the input cost has increased in Korean won, so that has created higher expenses and costs than expected. In addition to that, there has been the cumulative pricing actions and there had been -- that affected demand. And of course, there had been some strategic expenses being executed, such as brand communications. So there has been increase in advertising compared to Q4 of 2021. And for F&C, overall, there has been increasing feed prices, and there has been cost pressures in livestock. But in local markets, there has been contracting demand. So -- and there's also the decline in hog prices in Vietnam as well as in Indonesia for poultry prices. They had not been up to our expectation, but that also impacted our performances compared to the previous year. So we had not been able to see much improvement there. As for the second question regarding Food Korea, for cost increase. I mean we have to think about foreign exchange rate as well as global grain prices. They have been pretty much stabilized this year, so there would be limited impact from that. But when we think about LNG or utilities costs or labor costs, there would be some cost pressures there. If they rise, then, of course, we may consider pricing actions, but that would be subject to the conditions that we are facing. For Food business units, it's not actually seasonal, and we have inventories on a continuous basis. So in terms of margin improvement, it's not going to happen dramatically at one time. It's going to happen gradually. So that's the kind of pace we're expecting from the second quarter of this year. As for CapEx or investment plans for Food, regarding the scale of that, so for overseas infrastructure, for the past 3 years, we have made some proactive moves in the U.S., Vietnam and China. So overall, we have made some proactive investments already over the past 3 years. So for this year, specifically, we do not have massive CapEx plans for this year for the time being. But of course, we have to prepare for the future, so -- and in terms of expanding our global territories, we would be able to see some small investments in Australia, Thailand or Japan in terms of plant expansions. So we may do that as a pilot. Other than that, we do not have major investment plans for this year. And regarding the CapEx for our company as a whole, just to give you some pointers. So in 2023, our CapEx is going to be about KRW 1.4 trillion for CJ Cheiljedang as a whole. So compared to the same period last year, it was about KRW 1.5 trillion. So compared to that, it's a slight decline from that figure. And it's going to be about KRW 800 billion for new investments. And for new investments, it is KRW 200 billion less than the guidance. And if you look at by business units, so for Food, it's about KRW 360 billion, and BIO is pretty much similar. And for FNT and F&C, it's going to be about KRW 20 billion, respectively. So in terms of investments, the key details I would have to say has already been covered by [ JB ] previously. So for Food, we would be -- we would be investing as an extension to what we have done in the past, like chicken, P-rice and Mandu. We're having some additional capacity increase there. As for BIO, we have capacity upgrade for tryptophan, or some facility upgrades for interchangeable production facilities. And so this is the guidance for the time being. But if we think about past year, we gave the guidance of KRW 1.5 trillion, but if you look at the actual execution, it was about KRW 1.2 trillion. So we spent less than the guidance we have given you earlier last year. And this was due to changes in macroeconomic environment. We are making flexible changes according to how the macroeconomic environment is changing. So it's going to be the same for this year as well. We would be monitoring macroeconomic conditions to make sure that we can maintain financial stability and be flexible in our investment plans.

We have the next question from Meritz, Mr. Kim Jungwook.