Earnings Call: H2 2017

Mar 28, 2018

Dear investors, dear friends from media, good morning. Welcome to the results announcement conference on the 2017 annual results by Mengniu and Yashili. First of all, please let me introduce the management of Mengniu and Yashili. Mr. Lu Minfang, CEO and Executive Director of Mengniu. Ms. Wu Wenting, Vice President and Executive Director. Mr. Zhang Ping, Chief Financial Officer. Mr. Shi Dongwei, Executive President. Mr. Liu Shengli, Vice President for chilled products. Mr. Gao Fei, Vice President for UHT products. Mr. Zhang Yong, Vice President of strategic management. Mr. Chris Kwok, Financial Controller and Company Secretary. From Yashili, Mr. Shaoping Zhang, CEO and Executive Director. Ms. Wen Jieping, Chief Financial Officer. Now, I am giving the floor to Mr. Lu Minfang, CEO of Mengniu, to walk us through the annual results of Mengniu. Dear investors, friends from media, dear guests, ladies and gentlemen, good morning. I am very pleased today with my team to give you an overview of what we have achieved in the year of 2017. I am also going to talk about our outlook. This meeting room looks a bit small for such a big turnout. I am sorry for keep you standing. Probably next time we need to book a new room. We have a lot of new products outside. Maybe there is not enough room for it, probably. If you have time, have a look at them, during the tea break or after the conference, you can have a taste of the new products. We were joking that many new products, people in Hong Kong had no opportunity to taste them. If you have time, try. First of all, financial highlights. As for the year of 2017, the revenue is up 11.9%, over CNY 60 billion. This is for the first time for Mengniu to cross the threshold of CNY 60 billion. This is growth of very high quality. It is higher than industry average. Look at the growth in the second half. The growth rate is 15.7%, which is the best growth rate we have achieved in the past few years. If we exclude the factors of the selling of big bag milk in 2017, our growth rate would be over 12%, 12.5%. If you look at our sales and structure, they have improved a lot. Sales is up by 9%. Product restructuring brought us 2.8% of growth. This is thanks to our improvement of the general structure. You can see that from the gross margin. Our gross margin is up from 32.8% to 35.2%. Operating profit is also doubling, from 2.8% to 5.6%. We have remarkable improvement of operating efficiency, which is the main contributor to the profit growth. Our profit attributable to shareholders of the company is CNY 2.047 billion, due to some factors of our associate company. But it is very healthy from the perspective of net profit margin. On this chart, you can see if we exclude the factors of CMD. If we compare it like to like, we have this chart to reflect our net profit margin, which is up by 4.5% to CNY 1.7 billion. Our high-speed growth is of very high quality as well. We can also have a look at our revenue breakdown by segment. As you see, liquid milk, ice cream, and other new businesses. It is our first time to achieve double-digit growth in all segments. Liquid milk 10.2%, ice cream 15.3%, milk formula 28.3%, other business 11.9%. I want to highlight one thing. Liquid milk is up by nearly 10%, chilled milk 15%, ice cream 15%, milk formula, especially Yashili, has stopped loss and achieved a turnaround. Later, the CEO of Yashili will give an introduction. We are very confident about Yashili, because Yashili achieved 20% or more of growth in the second half. This is very good news. This means we are closing the gap. We have gained very good growth in new businesses. Cheese 26%, plant-based milk nearly 60%. We have achieved some preliminary results in our layout for future business. This is Nielsen data for the market share. You can see our market share in liquid milk, chilled products, and UHT products is all increasing, especially in chilled milk. Our market leadership is consolidated further. We can see as a fast-growing market, chilled yogurt delivered very good results. However, Nielsen data represents only a small part of our channel in market share. Market share growth is only part of our growth. We have a lot of data in omni-channel sales, for example, on campus. This is increasing very fast. This is reflected in our annual results. Probably some analysts will ask why the Nielsen data is not fully reflecting the growth. Apart from sales, our operation is in a very sound manner. If you look at our cash flow, which grows in a good way, CNY 4.5 billion last year. However, CNY 5.5 billion this year. This is for operating free cash flow. As for CapEx decreased from CNY 3 billion to CNY 2.1 billion. This is because we saved a lot in some investment projects. We focus our investment on new products. That is why you see there is a great amount of new products this year. Likewise, in terms of operation, we have achieved very good control in S&D expenses, which is down from 25% to 24.7%, while G&A is down from 4.6% to 4.2%. This is very good in terms of operating efficiency. Behind these figures, thanks to operating efficiency improvement, our salary has risen a lot. So our frontline staff members, including the management members, have seen their salary rise a lot. This is what we have achieved in our restructuring process. Other indicators are very good as well. Inventory turnover is down from 38 to 32 days. Receivables is increasing a little bit because we have more direct operated companies, like sales companies in Shanghai and Beijing and other big cities. Our business has made breakthroughs in these cities. As for payables turnover, it increased from 50 to 55 days. These operating efficiency indices represent several matters. First, with our reshuffling of departments, there is a very high level of synergy between the frontline staff and other business units. Also, it means that we have restructured our channels, including the distribution channel, which brings higher efficiency. Yesterday, we published our results, so I will not go into every detail. If you read the annual results, you may ask, and I will explain why our results are very good in 2017. We are very committed to delivering the target, which were made in the beginning of 2017, at the end of 2016. This is about the reshuffling of departments, operation, and layouts on upstream and downstream. We focus on the advantageous brands, and we have digged very deeply into the distribution channel. These are the reasons behind the good results. For example, as for the new business units, it took only 45 days to reshuffle the departments containing 45 thousand employees. We have 20,000 employees restructured. In our staff survey, it is shown that the support rate of the reform is more than 95%. With the reform, all these four major business units achieved a recovery in their growth. Some even achieved breakthrough in their growth. This is thanks to the new division system. Second, our operational efficiency is very good. You might note that there are often seasonal changes in the raw milk supply. In 2017, by the end of the year, our inventory of milk formula and big bag milk have both decreased a lot, even lower than the security inventory, less than 10,000 tons mainly. This is how we achieve the highest level possible of synergy between different business units. We also concentrated our procurement of raw material. There was a sharp increase in the price of raw material. However, we had very good cost control, especially on the packaging material. Our supply chain achieved good results with a lower cost for logistics as well, which is very good. We have deployed upstream resources of raw milk. You asked a lot of questions about CMD. I'm very pleased to tell you that CMD is supportive of the raw material sources, especially sourced milk to support our 11.9% of growth. We have milk sourced from New Zealand, and we reviewed with Arla in building the most advanced factory in China to produce cheese. We have imported premium milk, which is completed in our layout. As you can see, this new business to the three businesses, fresh milk, imported milk, and cheese, have all completed their construction. Another one, which is very important, is our focused business. As you can see, our pure milk, Milk Deluxe, Just Yoghurt, Fruit Milk Drink. These are not new products. But because of our concentration, these products have all achieved good growth. As for chilled milk, with a new product being launched, our growth is supported. We're talking about BB-12 and the Soft Milk, and these are the new products which are increasing very fast. Our Yoyi C new product, LC-37, is also a remarkable new product. This product have provided very solid foundation for the growth in chilled products. You are all following very closely with our sales team. I can tell you, the direct sales market has achieved more than 25% of growth in both Beijing and Shanghai. We have a new sales system for distributors, which is fully online. We have all channel execution system. There are two very powerful retail platforms in China, Alibaba's Lingshoutong. We have achieved a full partnership with them. Every month, we have 50 million or more of orders from the Alibaba's platform. If you look at our professional business in the e-commerce, we are still number one among the dairy products. We digged very deeply in the distribution channel, expanding our presence to reach every community, which is a very good support to our sales. In 2017, many jobs we did are covering different aspects, but in the end, I want to stress that- We will adhere to our strategy. Second, in our execution, we have been maintaining our high quality of execution. Thirdly, basically, our short, mid, and long-term business display have all been completed. I believe that 2017 is a year for laying foundation. Even if you say 11.9% is very difficult, this year has been a very hardworking year for our teams. We have laid solid foundation. Last year, in my result announcement, I mentioned I have one word, which is confidence. This year, for 2018, I would like to add a few other words, very confident. I am going to quickly talk to you about why we are more confident about 2018. Once we have the solid foundation, what will we do next? First, for the changing of the market, you can see, actually, with the change of consumers, they continue to have higher and higher requirements. They are diversifying preferences, nutrition, health, upgrading, et cetera. Second, in terms of cost, I think that there will be pressure on the rising cost of labor and raw material. This is something that we have to face whilst we continue to grow our business. Thirdly, the consumption environment has changed greatly. The traditional method, for example, supermarket, CVS, grocery store, versus the emerging ones, for instance, the development of hotels, university campuses, they are growing very fast. In addition, we also have the new emerging trend, e-commerce, unmanned stores, and smart vending machine. The consumption product in China will be facing a major overhaul change going forward, and we also need to have targeted strategies in this respect. In terms of strategies, what are our priorities? The first one, again, is still the long-term plan. Actually, by the end of 2017, we have started working on this. Our R&D, we will increase budget for 60% for our R&D staff. We will build world-leading R&D capabilities. This is also why today you can see we have so many very high quality products outside the door. I would highly recommend that you try some of our products outside. Second, we know that end of 2017, we were able to obtain World Cup sponsor, and this year will be a year of World Cup. We are very honored not only that we have obtained the title as the global official sponsor of FIFA World Cup, it will help us with our brand in Southeast Asia. In addition, all our brands will be covered. This is the first time in history that FIFA has given such a wide coverage for a brand. It covers our milk beverage, our yogurt, our ice cream, and our formula, as well as our fresh milk. Again, this is the widest coverage of products and marketing in history of FIFA. Second, for the omni-channel ability, we must build a sales team with omni-channel management capability and to have industry-leading efficiency. Thirdly, we still have other opportunities to continue to optimize our supply chain. Of course, in addition, we also aim for a breakthrough for our R&D teams. This is our requirement for them. This is one of the most important engines for Mengniu to continue to grow. In our board meeting yesterday, Mr. Liu said, in the past, innovation always came from Mengniu. We are going to build this as our core capability. Lastly, we focus on the culture of the organization and our value. Now, moving on to R&D. For the basic research, we will improve our investment in this regard, especially in terms of our packaging and some basic science studies. This is one area that we have to do well in order to lead the industry. The second one is the innovation mechanism. For example, the collaboration with other groups. At the moment, our overseas R&D is going well. This year, we will work with top four R&D centers in the U.S. In addition, we focus on consumer insights. In the past, we have recently established the consumer insights department. We hope that we would be able to transform our studies into our actual application of our products. Just now, I said that I'm doing an advertisement. You can have a look at the new products that we have this year. This will be an important year of innovation. We have in total 40 types of SKU. In terms of quality and quantity, they will increase dramatically. For our UHT yogurt, we will have great innovation. The first one is what we call ZUO Yogurt. It has taste as spicy, salty, and bitter. I really like the salty one myself. I have been to many markets. I've seen that people in southern China, they prefer spicy. In northern China, they prefer salty. Please go ahead and try. I believe you will love those products. In addition, in our UHT yogurt, we also have the Fruit Milk Drink, which it really has the real fruits. I have seen outside. It has actually been taken away by everyone. This is a great product. in January and February, when those two were launched, 100% of the production line are being utilized. What we have at the moment is not enough. We need to invest more in the production lines. You can see we have the Chun Zhen Just Yogurt, and we call it the Lovely Waistline. This is a great product. Going forward, we have also issued our first product, which is called ManRan Burn Milk. I hope that all the ladies here could have a taste. Going forward, we also have the A2 milk. This is based on our current selection of the Modern Dairy farm. Again, this product can be found in the market now. All the five products that I mentioned, they are now in the market, and they are sold very well. For low temperature in other areas, we have achieved great results. For example, bio diet substitute yogurt. The packaging is very unique. We have a patent for the packaging. For the first time, we are able to produce fresh milk for the Hong Kong citizens. Outside, we have our fresh milk. You can taste, the quality is very high. You can go and have a taste and see what you think. In addition, our Silk Americano Soy Milk. We work with an American firm. It is very suited for young people. In the past, we have this image of silk milk being suited for the elderlies, but you can try this one. In addition, our cheese and butter. Again, overall uplifting and upgrading of the product. They are also available in the market. We have completed our 2018 innovation. Actually, last December, when we had our customer meetings, all these products were ready. This is also why we are fully confident of the performance of these products. In addition, the promotion of World Cup, you can see. Besides becoming the official sponsor, this is for the first time, when you watch World Cup, you will definitely see Mengniu. It would be very difficult if you don't see Mengniu, actually. If you are watching the World Cup and you are not drinking Mengniu, that is quite shameful. The building of our parent brand, we are talking about the natural force, the survival of the fittest. We are a natural brand, a green brand. In addition, we have inherited the dreams of Mengniu people. We want to build a stronger brand, a better brand. In addition, we would also like to reflect this in our daily life. You know that Messi, he has officially signed with Mengniu to be our spokesperson. Why have we signed Messi? Because he was not born to be a football star. You know his story. If you know him well, you would know what the story was behind him. You know when he was little, actually, he needed some growth elements to help him to grow, and nobody believed that he would actually become a world-class football star. Actually, through his hard work, he was able to become a world-class star. If you go to our website, you can read about his story, Messi's story. I believe that Messi's story is the same as what we are promoting, because for everyone, we have that desire for natural power, and we want to unlock that desire and that power in every one of us. This is our strong parent brand. For the promotion of our brand, 27 brands, we have obtained the World Cup IP. During the tea break, you might have seen our advertisement, and Mr. Chen Daoming and Jingdong, they shook hands. I have talked more about our so-called Air Force armies, now talking about our armies on the ground. First one for the channel competition. This year, we already have a very clear three-year RTM plan, especially in third, fourth, and fifth-tier cities. We are bridging the gap in the weak market, emphasize our execution in counties, towns, and villages. Second, we will have implementation of new innovations in RTM model and mechanism. We need to empower our distributors. We need to utilize their abilities whilst upgrading their abilities. Use the internet model to help them with the RTM to become more efficient. This will activate the efficiency of sales companies and improve their profitability. Number three, to develop new channels. Our business divisions will work together to fully capture sales opportunities. Besides what I talked about, in the new retail, we will go faster. For example, O2O platforms, unmanned stores, smart vending machines. We are working with our partners for the unmanned stores and the smart vending machines. They are very avant-garde, and it was a shame that we were not able to ship the smart vending machines to site. Otherwise, you would all be able to try it out. In addition, for the e-commerce competitive advantage, we must expand on this. Our work with JD and Ali, we have seen great results. Going forward, we will have customized product digital management. We have also realized our own DMP. We have built the data consolidation from all aspects. We will use all this to help us to have more detailed consumer insights analysis. In addition, we have a professional team to run the e-commerce business. For supply chain upgrading. For supply chain, overall speaking, from the milking cow to the final product for the whole chain, how do we use the smart method? We have talked about our smart factory and smart logistics. We are working with Ali. You may not have heard about this. Every year in Mengniu, we have about 500,000 tons of product on the road. Where should we sell? Where should we deploy? Where is our milk source? This is the first time we have connected all the data together. We have used smart technology, used AI. Ali has sent an AI team to us to carry out the smart logistics deployment, and of course, our other resource deployment, et cetera, will continue to be pushed forward. One of the bright points is that our smart factory and smart logistics to be implemented this year. This is something that you can pay attention to. For our new business, it gives us great engines to go forward. For example, the Shiny Meadow that I mentioned. This is cold chain throughout. We also have new channel development, and I hope that the new channels will be talked about in our interim result announcement this year. I am not going to release any details at the moment. For cheese, we have retail cheese and advanced dairy processing cheese for catering outlets and especially for the children's cheese, it is growing very well. We are working hard to improving our production line because it is not sufficient enough to meet the demand of the children's cheese. For soy milk, the Silk Americano Soy Milk, we have actually already become the supplier for Starbucks in China. Now, if you go to Starbucks, you order coffee, they will ask you, "Would you like to add soy milk or milk?" If you go for soy milk, then that is supplied by Mengniu. Outside, overseas, we already have expanded. Overseas, we have established our factory in Indonesia, and we believe that this factory will be launched into production in July this year. This is a weak area of our business in the past, which is Yashili and Modern Dairy. Yashili, I am not going to go into details. Mr. Zhang Min will talk about it later on. For milk formula, I already said it is growing at 20%, so we are very confident about milk powder. For a CEO who came from the background of milk powder, if I do not do well, then it is quite a shame. For Modern Dairy, once we obtain it, actually, we are working very hard. We continue to push forward for improvement, for upstream raw material, raw milk supply, et cetera. I am very confident about Modern Dairy. When I participated in their result announcement, I have said we have the best Modern Dairy resources, and at the moment, I have said, there is no other company which can compete with Modern Dairy in terms of its quality and quantity. It is all high quality with a high quantity. At the moment, we have 3,000 cows, and this is not to be seen with any other companies. Going forward, we might also grade the milk, so at the moment, all our milk is A grade. This is a good thing. In addition, we also need to improve its operation efficiency, including our high value-added business. A2 milk is already launched into the market. For fresh milk, it already has strong underpinning support. We will also reduce cost, financial gearing, and improve our cash flow and margin. I can responsibly say that Modern Dairy will not be a dragging force of Mengniu in 2018. Of course, finally, everything boils down to people. From people's perspective, a few things I would like to mention. We will continue to work hard in our headquarter to improve our quality of service. At the moment, for our different function divisions, our leaders heading those departments, they have great sense of service. We need to work well in terms of service and control. Second, talent. With so many new business expansion, our requirement for management talents is also growing. This year, we will have a plan to nurture the successors and even people who can succeed me. We will start our training in April this year. Those who used to work in marketing, in sales, how do we train them to become general managers? In addition, we will also work on our brand marketing key positions. We need to increase our nurturing speed of talents. In addition, we also need to work on the market-based remuneration system. We will need to increase incentive for exceeding target performance. This is something that we have agreed in our board meeting yesterday. We need to continue to increase the percentage of incentives for those who manage to exceed their targets, not only for the core management teams, but also the key operational staff as well as our frontline workers. Whether it is for the talent or whether it is for structures, we need to have a good culture framework. In this year, we have gone through our culture again, and we are continuing to promote our culture. Here you can see all these core values that we were born with, and they are being promoted. In addition, we will also have some further advanced philosophies to come in to further improve our corporate culture. Today, in Mengniu, from top down, our spirit and our fighting capabilities and our passion is at a very high level, and I believe that this is a great support for our 2018 performance going forward. Thank you very much