Earnings Call: H2 2021

Mar 30, 2022

Investors, good morning. Welcome to China Mengniu Dairy Company Limited and Yashili International Holdings Limited 2021 annual results teleconference. This meeting will be conducted in Mandarin and there is English simultaneous interpretation service. I am Willow Wu, Investor Relations Department of Mengniu. Let me introduce to you Mengniu's management. They are CEO and Executive Director, Mr. Lu Minfang, Vice President and Executive Director, Ms. Wang Yan. CFO, Mr. Zhang Ping. Senior Vice President, Mr. Gao Fei. Vice President, Mr. Wen Yongping. Vice President, Mr. Luo Yan. Vice President, Mr. Li Pengcheng. Vice President, Mr. Chen Yiyi. Financial Controller, Company Secretary, Mr. Kwok Wai Cheong. From Yashili, CEO and Executive Director, Mr. Yan Zhiyuan. CFO, Ms. Chen Limin. Now let me go through the agenda for today. First, Mr. Lu Minfang of Mengniu will take you through Mengniu's 2021 annual results and the latest business development. After that, Mr. Yan Zhiyuan of Yashili will go through Yashili's 2021 results. After the presentation, there will be a Q&A session. You can dial into our teleconference system to ask questions. I will pass the floor to Mr. Lu. Mr. Lu will take us through Mengniu's 2021 results. Okay. Investors, ladies and gentlemen, good morning. Once again, this is the 2021 annual results of Mengniu and Yashili. This year, because of the pandemic, we can only hold this results presentation through live audio broadcast. We do look forward to meeting with investors face-to-face next time. There's almost 2 years' time that we haven't met each other. We do look forward to such a face-to-face exchange. Of course, we have arranged some roadshows with important investors and investors who are interested in us. We are going to explain our results in greater detail during those sessions. Now let me go through our overall annual results. In 2021, well, the year is the opening year of our five-year strategy of creating a new Mengniu. During the year, the whole team was full of confidence. If you look at the final results of 2021, you can see that we promoted product innovation and upgrade, and we enhanced brand power and vigorously developed online and offline omni-channel development. We achieved very outstanding results and consolidated our position as a multi-category leader. Now let's review our financial performance. Considering that the performance in the year is not fully comparable due to the impact of the pandemic, this time the full year 2019 results are also set out so that you can have a better reference. In 2021, revenue reached CNY 88.14 billion, up 15.9% year-on-year. Basically, over the past five years, last year was the fastest growing year. In fact, the results exceeded our growth expectations given at the beginning of the year. This revenue includes the progress of our M&A, including Aice and also Bellamy's Organic. For our organic growth, it is very strong, 13.9% year-on-year. In fact, we met our full year revenue growth target. For the revenue growth target, basically, the main contribution was from sales volume growth, and there's also growth in the structure. You may still remember that in the first half of the year, we talked about challenge in relation to milk price. If you look at our gross profit margin now, it shows the impact of milk price on us. Gross margin came down 1 percentage point. However, if you do a more detailed analysis, you will know that in 2021 comparing 2019, actual milk price rise was more than 12%. If all this increase was turned into gross margin impact, then it would be equal to 3 percentage points impact. However, we digested most of the impact from milk price rise. The eventual impact on our gross margin was relatively low. Of course, if you look at our operating margin, 5.5%, same as in 2019. Again, this is because of challenge of milk price increase. If you look at our S&D expense ratio and administrative expense ratio, both came down. Given this situation, our operating profit margin is still quite good. At the same time, for milk price increase, there is also profit increase from other joint venture and affiliates. Our net profit was CNY 5.03 billion, up 42.6% from 2020 and 22.4% from 2019. From the financial point of view, you can also see that our operations are very good. Next page. If you look at a revenue breakdown by segment. In the past few years, we have laid out some important categories, and there are categories that we are strong all along, and we achieved higher than market growth. Liquid milk grew 12.9%. Of course, we can see clearly that our White Milk and Milk Deluxe. Well, Milk Deluxe already exceeded CNY 30 billion, so it is already the number one brand in the world. For yogurt, we within a short period of time, we achieve a leading position. Of course, after the pandemic, consumers have greater demand for dairy products. They have greater demand for health and nutrition. Besides, in terms of our brand building and also channel penetration and so on, we have achieved good work. Ice cream grew 61%. This is strong growth. For organic, the growth was 19%. It is very strong. If you look at our M&A with Aice, well, there is a contribution of more than CNY 1 billion in revenue. For ice cream, in terms of scale and development pace, it's very good. Of course, gross margin for ice cream also increased fast. Let's turn to milk formula. It grew 8.2% year on year. The main contribution was from adult milk formula, which grew fast. Last year, we said to you that it is part of our important strategy. For cheese, it also grew fast, more than 40% growth. Such growth contributed to our overall sales revenue. Of course, we have made some moves in Australia in terms of Bellamy's Organic, so concerning cheese and our F&B business, it is going to give us a lot of support in terms of opportunities. It is an important part of our strategy. Overall speaking, we are in the premium brand Milk Deluxe and also the building of our main brand and then Shiny Meadow. There is also adult formula milk and cheese. All these are in line with our strategy. Our growth comes from the importance attached to strategy and our focus on core brands. Next, I would like to talk about other financial operating indicators like cash flow. Here operating cash flow, CNY 7.55 billion. This is the highest in our history. Comparing with 2020, we are up 41%. This is partly because of growth in profit and at the same time, we did good work in terms of cash management. In 2021, for CapEx, especially CapEx related to construction and expansion of plants and production facilities, the amount of CapEx was CNY 6.22 billion. This can support our coming three years or five years growth. This is a strategic move. Last year, we communicated with investors about this. After 2019 and especially in 2020, 2021 and 2022. Concerning product capacity for coming 5 years or these 3 years will be the investment period, and it is giving a strong foundation for our future growth. That's about CapEx. You may be very interested in expenses and investment. We enhanced our R&D and innovation capacity building and also for online, offline, channels, we also increased investment. Overall speaking, S&D expense ratio came down. It is 26.6%, lower than in 2020. Now we are back to a more normal level. Comparing with 2019, we are down 60 basis points. For administrative expense ratio, it is also coming down year after year. Comparing with 2019, we are down 30 basis points. This is mainly because of the scale effect of revenue and effective administrative expense control. In 2021, we launched a long-term incentive program for future development. For this program, we recorded expenses to our second half account. This is very important for our future development, and it is a long-term incentive program, mainly covering middle level and senior level management. Next page. If you look at operational efficiency, all our indicators are at healthy level. Inventory turnover days came down to 39.3 days. Accounts receivable turnover days also decreased by one day to 14.8 days. Payable turnover days, 54.9 days. In 2020 and afterwards, this is a rather stable level. If you talk about operational efficiency, all along we have been at a very good situation. Next page. In 2021, our growth was satisfactory to us, and it exceeded our overall expectation and target at the beginning of the year. We seized the opportunities from the growth of the industry. At the same time, we upgraded our strategy, and this is already in place. There are 5 points here. First, concerning dairy product consumption, there are opportunities that we have seized. At the same time, we promoted product upgrade, for example, Milk Deluxe and also Shiny Meadow. Demand increased. As a result, raw milk costs rose. However, we have made some moves in relation to raw milk, and we built a good milk source, and we lower cost and expanded revenue. As a result, we are able to withstand the problem and challenge. At the same time, we need to be focused on dairy business. We believe that the sector still presents huge opportunity. If you look at penetration rates of various categories, well, it has not reached the level in advanced countries. For example, today if you look at cheese, Mengniu's cheese is number one in the sector for fresh milk and also adult milk powder and other niches. All these have led to upgrading in our product structure and increase in demand. For these categories and their penetration rates, well, we still see huge room for growth. We will continue to focus on the dairy sector to do a good job. Of course, we're talking about brand and product upgrade, and this is our strength. In terms of product innovation and brand building in the dairy, Chinese dairy sector, we have been a good player. This is our strength. Later on I will talk about our plan for 2022. We did digital transformation, supply chain management and so on. We promoted digital upgrade in order to enhance operational efficiency. Now let me go through the highlights of each business segment. Liquid milk up 16% year on year. We continue to lead the industry. As you know that our room temperature products recorded good growth, strong growth. For channel segmentation and penetration, we deepened that with a lot of effort for premium brands, especially Milk Deluxe. We did a lot to promote Milk Deluxe at the same time. In terms of new product innovation and desert organic pure milk, it is the best in quality in China, and it is positioned as a premium product. This year, growth was very strong. At the same time, in terms of digital operation and also membership system, Milk Deluxe achieved strong growth from that. Milk Deluxe achieved 33% growth in 2021. With such a strong base, it still performed strongly. We have pure milk and other room temperature products, and the product mix is being optimized. Growth is strong, more than 20% in terms of the pure milk product mix. For room temperature business, from brand, channels, innovation and digital work, we have seen very good development. Another good business segment, next page. We saw strong growth momentum in fresh milk, we launched innovative products, we continued to do brand building. In only 4 years in the high-end milk, we achieved and continued to expand market share. Net revenue was up 85% year-on-year. In some premium channels, we are actually number one in terms of sales of fresh milk. In the past few years, we did a lot of work in terms of fresh milk supply chain layout, that's why the result. In China, well, in terms of the layout of fresh capabilities, we have basically completed the basic layout, and this layout can support our Shiny Meadow moving towards a CNY 10 billion of scale. Another thing is our cheese business. For our cheese business, we have two things, our own Mengniu cheese, and there are also some very special cheese products, including those for the food services. We have now new bakery, new food services, and new tea beverages, and we are leading in these segments. At the same time, in July, we completed strategic investment in Milkground's share placement. We developed a leading position in the cheese market as a result. These two businesses and the synergy is gradually realized. For cheese, very soon it will become another segment worth CNY 10 billion in Mengniu. Ice cream and chilled products. As you know, in the overall industry, there was some challenge. The chilled product business was more affected by the pandemic, relatively speaking. However, we have made some strategic adjustments. For YoyiC, this is a probiotic category. It grew 22%. We have the LC-37 series. It grew almost 100%. As a result, when the market was at a downturn, our chilled products still achieved growth. We can grab market share as well. For our ice cream business in the past few years, actually, we strengthened ourselves with much effort. For our ice cream brand, it is very good. We have Sui Bian, Mood for Green and Deluxe. These brands are well recognized by consumers. These years we did a lot of work in channels. We improved and strengthened our channels. Growth in the ice cream business is very good. Besides in Southeast Asia, we saw opportunities in ice cream. That's why we invested in Aice. The Aice team consists of the Mengniu team members, so that's why the synergy between Aice team and Mengniu team is very good. In Southeast Asia and also China, we want to be Asia number one ice cream business company. I think we look forward to that. For milk formula, well, we have both gains and loss. For adult milk, children's milk, organic milk powder, we achieved good results in these areas. For adult milk, we focused on adult milk, and we also focused on aging population. We have high-end premium adult functional milk product. It is in the premium market. In 2021, we grew 76%, it helped Yashili's growth of more than 20%. For infant, milk powder. Well, of course it takes a process to develop the brand. Growth is relatively stable for the time being. We want to continue to focus on product development and brand accumulation. Another business is Bellamy's. Bellamy's is a very good brand. Bellamy's brand power is very good. However, because of impact of the pandemic, as you know, cross-border e-commerce and Daigou channel were quite hardly hit. In terms of Bellamy's brand and also the product strength of the milk formula itself, it is very strong. However, it is mainly based on Daigou channel, so it was affected by COVID-19. In 2020 and 2021, there was some decline. We have already completed the adjustment, so when the pandemic gets better, we believe that the Bellamy brand will be able to help Mengniu in the organic categories to grab market share so that we can become number 1 in the organic segment. There is one important point. We have many international investors. You are looking forward to the dairy product industry. Mengniu also attaches much important. We are the ones that are doing very well in ESG. Just here I would like to take this opportunity of our result announcement to speak to you about our United Nations Sustainable Development Goals and our new 2025 green sustainable development strategy, which is in line with the 2025 new Mengniu strategy. We are establishing a set of high quality solutions and models in the industry. For GREEN, and it stands for first is governance, speaking from sustainability perspective, how we would be able to continue to provide high quality services. The second, responsibility. For this regard, it is more about how do we realize common prosperity in the dairy sector. In addition, as well as environment. This focuses on carbon net zero. This is the pathway to net zero. This is a strategy that we have. In addition, we also talk about the responsible ecosystem, which is about how we are going to work with our peers and to establish a great ecosystem. Finally, also very important for Mengniu, our ultimate goal is that we wish to bring better nutrition and excellent products to our consumers. Nutrition is very important to us and therefore you can see that the initials of these five letters would be GREEN, and the GREEN also represents the 2025 new strategy. In addition. For the capital market, it has a lot of ESG requirements. There are a total of 500 ESG indicators. In terms of some of the indicators that can be quantified, we have already made sure that they are quantified in our work. Whilst releasing our result announcement this year, in May this year, we would also be releasing our specific carbon neutral plan, carbon peak, carbon neutral targets, as well as a roadmap. Mengniu has done a lot of work in the area of sustainable development. In 2021, we have also announced our first carbon neutral target. As we have said, first half of this year, we will also be announcing the specific carbon neutral targets and the carbon neutral roadmap. We have also joined UNGC, which is the first Chinese dairy company to join the Pathway to Dairy Net Zero. We also have, like, two major raw milk suppliers. Meeting carbon neutral initiatives is very important. With Modern Dairy and Shengmu, they have already launched their carbon neutral initiative. We have already started a lot of work, for instance, with the UHT as well as our packaging, et cetera, as well as the Mengniu employees. We are all working very hard in working on realizing these goals. In addition, our employees have worked with the farm very actively. At Mengniu, we have also won a lot of awards in this regard. The investors pay a lot of attention to us. This time, we have a change of our board, and therefore, this time, we have also included ESG into our KPI. For our board, we are also becoming more diversified, and we have more women. We have added 1 female director and 2 female executives. In addition, we have further improved our corporate compliance management system and established an ESG strategy. I believe that we would be able to realize our 2025 strategy in a robust fashion. Finally, I would also like to say that we have achieved great results in sustainable development. The very important one is the MSCI ESG rating was upgraded from double B to triple B. This is the highest rating in the Chinese food sector to date, and it also became a constituent of the HSI ESG Enhanced Index. Of course, we have also been awarded for our hard work during the fight of the pandemic. In the meantime, 5 of our factories were awarded the National Green Supply Chain Management Enterprise, as well as 22 factories awarded as National Green Factories. Here, I would also like to mention this photo. This photo was taken by our Wuhan factory staff in our Wuhan factory. You can see that the environment is quite pleasant. In addition, we are also building a recycling ecosystem. Here you can see in this photo, there is an egret. This egret would come every afternoon at 3:00 P.M. to our park. So our staff named it, Fifteen. Fifteen represents 15 o'clock during the day, and we also call it the nominal employee of the factory. This can show you the great water quality of our park, and we hope that the pandemic will soon be over. In addition, we also welcome our friends from the capital markets to visit our Wuhan factory and to see our special employee, the Fifteen. I believe that you're all very. You would like to know about our results for 2021 as well as the future. Looking ahead, we believe that the opportunities still outweigh the challenges. We believe that a CAGR growth of 6%-8%, this still represents the growth opportunities in China. With this opportunity, we will definitely be dedicated to our 2025 strategy and to grasp these opportunities on various sectors. Same as for raw milk, actually, it is possible that it will maintain at a high price. We all know that the first half of this year, the cost is going up. We are confident that through our cost control as well as expenses control and help from the suppliers, and we would be able to collaborate, and with the strategic suppliers, and to continuously strengthen our milk supply. In terms of different categories, I had also mentioned them earlier, and I'm not going to go into details, and these will also bring certainty for 2022. For 2025, we would like to create a new Mengniu. This is our new Mengniu strategy. A few areas of that we would like to focus on, for instance, our RTM, as well as our capability to consolidate as a buyer, et cetera. They continue to strengthen. I would also like to take this opportunity. We have made some launches. I believe that these are very important to investors as well. We'd like to talk about the upgrading of our brand. This time it is the first time since 1999 that Mengniu is upgrading its logo and the trademark. We say that our original heart remains the same. We had invited Rob Janoff, who was the Apple logo designer, and to work with us on our new logo. We continued to use the green color, and when you see green, you would think about grassland. Our whole logo still reflects that, where we come from or we are going to where, and what sort of brand we want to become. This design, again, shows that we are expanding boundaries, we are looking above at the sky and realizing our ambitions. When you look at this and you think the green is very clear, and this curve here, it represents our mother river, which is the Yellow River. If you know about Chinese geography, and you know that the Yellow River runs over Inner Mongolia. Because of the mother river's nurturing, and so that we have the excellent grass in Inner Mongolia, and it has also given us the gold quality of raw milk. On the upper right-hand side, you can see this cow horn, this represents the spirit of Mengniu. The upgrading of Mengniu, again, we have reserved the original Chinese culture, we have reserved the Chinese characters in this logo, this reflects our great strategy for 2025, this also shows the highlights that we have for the future. I'm now going to repeat the creating a new Mengniu in 2025 strategy. Mengniu is loved by consumers. It is an international, digital and intelligent company and brand. You all know that for 2022, this is the beginning of the year. I would also like to very quickly to report to you about this. I do not have materials prepared for this part. You all know that in Chinese New Year in 2022, Mengniu was the absolute focus. You can see that for Mengniu, we had been providing strong support to the football team, the Chinese women's football team. In terms of our traffic and the trending, we were going to number 1 and number 3 in the trending rank. In addition, during the Winter Olympics, you know that Eileen Gu basically equals Mengniu. That is to say, in terms of these plans and moves that we have made, it shows that first is the sports spirit of Mengniu, and we believe that nutrition and sports go hand in hand. In addition, you also know that for these plans, we have made these plans many years ago and not just recently. This shows that for Mengniu, in terms of the sports as well as the nutrition marketing, this is something that we have always done many years ago. This is something that I believe everybody can see on the internet. In terms of the brand building, we have been able to really solidify our brand and overtake our competitors on all fronts. This is a great start for 2022. At today's result announcement, whether it is from our financial perspective or from our business and expectations and strategies, all I can say is that I'm very confident for the future. For 2021, we have done well. For the first part of 2022, we have also done very well. Even if at the moment, the pandemic as well as the present, there are some uncertainties from the management perspective. We are still full of confidence that we will achieve better results in 2022. In the meantime, we will be making the second year of our five-year strategy a success. In addition, we are very confident that we can do very well for our 2022 going forward. This is my presentation so far. Thank you.