Earnings Call: H2 2019

Mar 26, 2020

Secretary Guowei Chang, Yashili's management, CEO and Executive Director, Mr. Yan, CFO Wenjiating. I am going to go through the agenda for today. First, Mr. Rong from Mengniu will go through Mengniu's 2019 annual results and the latest developments. After that, Yashili's management will go through results of Yashili. After that, we will have a Q&A session. You can dial in to the telephone system to ask questions. You are most welcome to raise more questions. I will pass the floor to Mr. Lu. He will go through Mengniu's results and also the outlook for 2020. Investors, ladies and gentlemen, media friends. This is a rather special way for us to present our results via the telephone. In Beijing, in China, we can see that control of the epidemic has been done well, and I hope that you will all take good care of your health, because this is a very exceptional time. Secondly, it is a pity because originally we were able to showcase more new products to investors and friends, because we have many good new products for 2020, and just now I drank one which was still not available in the market. It is a very tasty product. This is really a pity, but I hope that in the middle of the year, you will be able to have a taste of it. I believe you have got our PPT. I think at the beginning, perhaps, some pictures should be shown because I guess, many investors are not able to see very clearly of me. I think my picture, my photo, should be shown at the beginning. Okay. This is just a joke. I will go through the financial results of 2019 of Mengniu. You can see that we achieved high growth for three consecutive years, and in 2019, we are still able to maintain good revenue growth of 14.6% at CNY 79 billion. Our gross profit also grew well from 37.4% to 37.6%. Up 20 basis points. For our operating profit margin, it also rose, reaching 5.5%, EBITDA 9.4%. You can see that our profitability improved. This is in line with the guidance given to the capital market. No matter whether you look at our revenue and our profit, we exceeded the guidance. Now, if you refer to all the figures, I would like to clarify that these include Junlebao's business up to 19th November, and also Bellamy's December financial data. These figures are included. When it comes to business development and expansion of various segments, we have done well. In the past three years, I shared with you our business development plan and strategies, and they have been well implemented, and they have been effective. These can be shown very clearly by our revenue and our profit. This shows that we are striving for high-quality growth. Here you can see the upgrading of our product mix. We have increased investment into our brand. We have expanded our channels and routes, and we focus on operating efficiency improvements. All our assets have borne fruit. At the same time, if you refer to growth of our star categories, well, they have good achievements. For Milk Deluxe, up 24%, so this is really excellent. We achieved 20 odd percent for room temperature yogurt, and then for chilled yogurt, we have got high single-digit growth. So our market share is also improving. For the whole year, for raw milk cost, there is a mid to high digit increase. However, our GP margin was still stable, 37.6%. This is mainly because of our upgrading and optimization of our product mix. VAT rate is also helpful, and at the same time, procurement cost of our raw materials has been kept under good control. Given this background, our GP margin is really very stable and net profit margin improved. It reached our target last year, at the beginning of last year. I refer to 50 percentage points, and this year we got an improvement for 40 basis points. This is a very good achievement. I am going to analyze for you our revenue breakdown by segment. Liquid milk grew strongly. You can see from the number, 14.3%. In 2018, it was only 13%, so we have further risen. This is because our RTM work has been very effective. Just now, I already shared with you the growth of our various brands. For our basic milk products, we enjoy double-digit growth. This is very good. In terms of our channels expansion, again, it has been done well. Here, if you take a look at a category that is not doing quite well, that is ice cream, down 6%. In the past few years, we enjoyed 10% CAGR. This year, we did not do well in ice cream, so we need to achieve some major breakthrough. Yashili business growth, 14%. This is based on our expectation. At first, we thought that it should be growing at 20%, however, because of some of our strategy adjustments, well, later on, my colleague will talk about Yashili business. There is also some of the decline because of some reorganization work. This is basically the reasons. Let's take a look at our market share. Our market share has risen steadily. For our UHT products, market share rose to 21.3%. Chilled yogurt, our leading position has further been reinforced. If you look at March all the way to November 2019, we have already reached number 2 in terms of yogurt. We have also high-end yogurt brand, which has been reinforced. In China, within just two years' time, we had reached the number 1 position. In terms of channel adjustment and change, we had taken up a lot of responsibilities, and we are now in a leading position. So market share rose to 26.7%. If you look at business as well as market share in 2019, our results are very good. Let me talk about our operations. Operating net cash, CNY 6.3 billion. Comparing with last year is more or less the same. This is because this year, CNY was quite early. There is some impact because of stock replenishment. CapEx, CNY 4.3 billion. This includes Mengniu's CapEx of CNY 3.2 billion. Junlebao's CapEx is relatively large, so there is some increase, and our capacity has been expanded. At the beginning of the year, we said already that capacity utilization has reached a historical high. We need to further expand our capacity to enable our high growth. The capacity of many of our products will have to expand. We also have many innovative products and other new products, which need a lot of CapEx investment to achieve high growth rates. That is about our cash position and CapEx. S&D expenses, more or less flat. There is some decline. If we exclude selling expenses of Junlebao, we sit down from 27.5% to 27.17%, down 37 basis points. This is in line with our strategy plans. We hope to further optimize our scale expansion to improve our sales. Administrative expenses, more or less the same in 2019. If you look at expense ratio, it is quite flat. It includes expenses related to M&A and also big R&D expense increase for staff cost increase. Well, actually, if you look at the ratio, it has actually come down. This is quite good. Let me turn to operational efficiency index. I do not think there is any special points to make. Our inventory, well, because CNY came early this year, here you can see an increase by 3 days. For the other items, more or less within our expectation. Receivables, well, this is in line with increase in revenue. This is a point I would like to make. Now, I would like to very briefly review for you our 2019 business, so you will be able to understand some important points behind our figures. Here you can see our growth. We are able to enhance our competitiveness and our ability to ride out challenge in relation to supply. Now, we have optimized our product mix, and we have improved our product competitiveness. We have achieved very good results, in brand internationalization. If you look at our new business segments and also high-end brands, our sales and marketing have achieved very good results. We have also done well in relation to route to market. The RTM execution has achieved significant progress. That is why we are able to achieve high growth rates. This is one major reason. We have deepened our regional RTM strategy. If you look at the room temperature BU, we have launched the Smart Network project, and we realized 100% coverage already. This is a very good project launch. For our omni-channel execution, lft.com, partnership, and penetration into towns and villages program, have all been strengthened. Last year, I emphasized that in 2019, one very important battle, is to do a good job in relation to channel strategy. Well, of course, dairy segment will still be our focus. We have done a few things. Junlebao, was disposed of due to weak synergy, and we have completed acquisition of Bellamy's, which is the leading Australian premium organic IMF and baby food brand. We announced acquisition of Lion Dairy and Drinks, and we also strategically invested in Milkground, which is the leading domestic cheese brand. You can see that our business layout is such that focus is on our dairy segment in order to improve our core competitiveness. That is the first point about our 2019 business review. Secondly, how are we going to establish our sustainable development strategies and management structure? In the board meeting in 2019, we had approved the formulation of sustainable development strategic, or sustainable development committee. We have formulated the sustainable development strategic roadmap, and some undertakings. Now we have a three-year strategic plan, and we are going to implement it so that we will be implementing our sustainable development strategies. These will form the core part of our future development. Now I am going to talk about our various business segments. First, room temperature brands, premium room temperature brands. The growth exceeded the industry growth rate, so we are leading the market. Milk Deluxe, grew over 20%. We are able to upgrade our product and expand capacity for Just Yoghurt and Fruit Milk Drink. They grew over 20% and 10% respectively because of the branding effect. Just now I talked about our channels, I will not explain further. We are strong in the room temperature segment. For chilled products or low temperature products, we have an edge in it. For our new products, we perform very well. For example, YoyiC. We also introduce some new products, that is the Champion Yogurt Probio M8. This is the first probiotic self-developed intellectual property in China, and we performed very well in this product. For our low temperature products, we have already broken through the model of competition based on price. We are actually now based on quality and value, and we are digging deeper into our omni-channel capabilities. For our professional, we achieved double-digit growth. Our high-end Shiny Meadow brand grew five times. If you look at the market share in China, we are number one already. I talked about T+0, our supply chain capability, and this capability improved significantly. Now our T+0 can already cover almost all yogurt product segments. We have launched TiantianPay smart retail platform, which is a one-stop shop platform. For Yashili, later on, the CEO will make a more detailed presentation. Sales grew 13%, OP margin turned positive. In 2019, operating profit was in line with our expectation at the beginning of the year. For high-end products, the growth exceeded our expectation. For low GP margin and little low-end products, some had been phased out. Later on, Yashili will talk about also our cost advantage. Yashili's growth was lower than our expectation. However, if you look at our adjustment in our product mix and also our emphasis on high-end products, these are in line with our expectation. Even though we are not meeting face to face, I would like to say that in 2019, we achieved high-quality growth. This is continuing. Our team, our management structure, our operating efficiency, despite market changes, exhibited good performance. If you look at the implementation of our five-year strategy and plan, we are actually implementing our strategies according to plan. 2019 is very satisfactory to us. I think our growth rate is closely related with our vision and also with our judgment. Last year, we also achieved a historical high level. This is because right now we have very good staff morale. I think our staff morale, as I said, was at a historical high level. For 2020 prospects, I am sure later on investors will ask a lot of questions about the market, and I will have more sharing with you later. Okay. Now, I would like to turn to the epidemic. First of all, I would like to say that this epidemic is really a black swan. It has caused big impacts. But in the process, concerning epidemic control, I think we are leading in the industry in terms of our infection control work. This really shows our competitiveness. This epidemic as well as our performance, our work during this epidemic, really shows our spirit of world-class quality and born for greatness. I would like to make a few specific points so that you will be able to understand what we have done. First of all, under the leadership of the board, our decision-making speed is number one in the industry. We also responded fast to upstream and downstream of the supply chain. We supported healthy development of upstream and downstream players. For no-interest loans, we make use of no-interest or low-interest models to give support, especially our upstream milk source. In this way, we can avoid any raw milk supply crisis. This laid a very strong foundation for our business. Turning to our brand reputation, our brand reputation improved significantly. Because of our outstanding performance in the above two items, our brand reputation improved significantly and has been leading the industry by a large margin. If you look at some statistics and also our online survey, our brand reputation is really leading the industry. This shows the good work of Mengniu's team. Besides, we have actually done a lot to discharge our social responsibility, as explained earlier. Concerning our epidemic control work, in only a few weeks' time, we very quickly sent a lot of protective gears and materials to healthcare workers. Now, during that period, given some very difficult environment, we are still able to send a lot of supplies to each household and also healthcare worker. This shows that this is not only about discharging social responsibility. We think that this is really our commitment. In Wuhan, in a center, in an emergency center. That was also operated by Mengniu. We are talking about 40 odd million pieces of protective gear and clothing. This shows that we do have the ability to respond to emergencies. In China, there are around 4 million odd healthcare workers, almost 5 million. However, during the epidemic, healthcare workers had given positive comments or commendations to Mengniu. We are the premium choice already in relation to milk and dairy products. We have been meeting and maintaining this good relationship with them. I think in the future, this will be turned into a very good driving force that will drive our sales. Our performance is really very outstanding in combating the epidemic. Many of our people have taken the initiative to go back to the sales outlets and factories and plants to work. Our work resumption rate is very high. Apart from the plant in Wuhan, in all other plants in China, they had already resumed work up to 100%, apart from those in Wuhan. This is really encouraging. Of course, the epidemic has brought about many changes. There are three main changes. First, consumers now pay more attention to health, nutrition, and products. If you look at the data, I think that in terms of the searches for community, it increased by three times after the outbreak. E-commerce O2O platforms saw strong growth. For e-commerce platforms, it grew more than 50%, O2O more than 2 times. You can see the market share of our e-commerce business which kept on rising. The third point, there is a big change in the way of marketing. Here you can see a lot of social media involvement and also short videos. In the '80s, people stayed at home, and at that time, people watched CCTV, and now they always look at the handset screen. This is a big change. I think on the news, you have read a lot about the epidemic. I think there really has been a lot of change. I think this has also become a future trend already. For Mengniu, in face of this change, we are making active change and preparation. As you know, we work together with the government to promote people's nutrition and also dairy products. We have published a lot about nutrition. I think people's immunity is closely related to this epidemic and also people's age. I think it is right to promote nutrition. At the same time, we empower the industry value chain. There are five main measures to ensure the capability of upstream and downstream. Upstream is important. Downstream, well, distributors. Many stores have been closed, so there is funding pressure. But we are giving support to both upstream and downstream partners. We facilitated the smoothness of channels. Some channels are closed, some channels are opened. For example, O2O platform and community marketing. In just one month's time, we started from zero all the way to 90,000. This is very high. Then, this business has accounted for already 10% of the total. This is O2O community sales, 10% of the total already. Apart from e-commerce, community sales now accounted for 10%. Well, because it started from scratch, so I am really shocked to see such development. Then, we clear channel inventory because after CNY, almost all stores were closed. We have to make sure that our products will stay fresh, so we put in place a lot of measures to clear channel inventory. Finally, internal management efficiency. We want to raise it to exploit internal potential in achieving higher cost efficiency so that we can ensure our source of raw milk and also source of funds. Up till now, I think that all our responses and measures are leading in the industry. Our market recovery, our work resumption rate, is also the highest in the industry. Our work resumption rate as well as effectiveness was also the highest. Well, in the second month after the epidemic, our resumption rate has already reached number 2 position. I think the epidemic will definitely cause some impact on our 2020 business, and there will be some one-off and temporary impact on our business and profitability. However, our recovery pace is very fast, and we expect that we can resume a normal growth trend very soon. Apart from what is stated now about brand adjustment and also omni-channel development, cost control, and so on, for 2020, there are six strategic priorities, and they will be implemented continuously. Long-term plan about our milk source, our RTM strength, our brand proposition, and also our rapid implementation of our post-acquisition integration, marketing, and sales, and so on. I think these are our strategic priorities. They will continue, and they won't be affected by the epidemic. Finally, I would like to talk about something that you may be very interested in, and that is our overseas strategic layout. In December 2019, we completed acquisition of Bellamy's, and we also announced the acquisition of Lion. Bellamy's, Burra, Lion Dairy, and now we are already making plans about business integration and synergies. We set up international business unit, and on March 1, the main person in charge reported for duty, and he would be responsible for managing all our overseas businesses. His 2020 focus will be Australia, and he is right now in Melbourne, responsible for integrating the acquired businesses. Post-investment, the plans and integration plan have been completed. In the first half of the year, the Lion Dairy acquisition will be completed, and then there would be better supply chain integration and business synergies in Southeast Asia. Let me now talk about Bellamy's. In December, after completion of the deal in January and February, the results already exceeded our budget. In terms of sales or revenue and profit, they already exceeded the original 2020 budget. The development is very healthy. The team is very stable. At the same time, for the registration of the formula, it is now underway, and I think within the expected time, the formula products in China can be launched. I think this will give a strong boost to business development of Bellamy's in China. We are highly confident in Bellamy's business in China. Today, I have shared with you what we have done in 2019 and the prospect for 2020. Last year, we already talked about our strategic plan, and I will not repeat the points. Now I would like to pass the floor to the CEO of Yashili to make the presentation. He is the newly appointed CEO, Mr. Yan. He will go through Yashili's results. Thank you very much. Thank you, Mr. Lu. Dear investors and friends from the media, good morning. On behalf of Yashili, I am going to report to you about our 2019 annual results. Today, it is the first time that I am giving the report on behalf of Yashili, and I hope that everyone can look after yourselves. I now begin with my report. In 2019, we have revenue of CNY 3.4 billion, an increase by 13.3%. In terms of our gross margin, it has gone up by 6.1%. In terms of our operating gross profit margin, it is down by 2.5%. In 2019, the growth mainly comes from a few factors. The first one, for baby formula, we continue to develop organic products. In the meantime, we have also deep dived into goat milk. In goat milk, we have seen a very good growth. In 2019, the growth has achieved 60%, far higher than the industry average. In the meantime, for our adult products, we have improved our coverage in terms of the new functional products and moved into the high-end. This has brought in good development. Number three, we have used some high-end celebrities to become spokeswomen and spokesmen of the brand, and we have improved our advertisement in the media and improved the exposure of the brand. These are the regions contributing to the growth in 2019. However, as Mr. Lu has said, we have moved out some of the medium and low-end products and removed some of the low profit-making products, which has helped with our growth. In terms of our GP margin, we have seen it come down by 2.5%. This is mainly due to a few reasons. The first one is adult milk and base powder. Sales revenue account for a large percentage, and they have gone up. However, their gross profit is smaller than that of baby formula. Second, the raw milk price is improving steadily, which has put pressure on the cost. In terms of the net profit growth, it mainly comes from the gross profit improvement brought by the sales revenue. Second, we have been able to improve our efficiency when it comes to the SG&A as well as management fee, so the expense ratio has come down. In terms of our revenue by product, milk formula as well as other dairy products, their sales revenue compared with the same period year-on-year has improved by 16.4%, and it has also driven the growth of adult milk. These are three reasons. First, because of the growing community and number of middle-aged and the elderly. Second, we have realized national planning. Thirdly, the high-end adult powders percentage has increased. All of this has helped to contribute to the growth of 16.4%. For dissolvable products and other business that are not our main business, we have seen a small decrease, but the overall impact is not very big. In terms of cash flow and capital expense, the net cash flow from operating activities is CNY 177 million, which is down by CNY 87 million compared to the same period last year. This is mainly because the imported products and raw materials percentage has increased and taken up some of the cash flow. In terms of CapEx, using for newly built and moderation of existing factories and manufacturing equipment, this roughly maintains at about the same level, CNY 100 million. In terms of SG&A, SG&A has come down from 37.9% from 2018 to 28.2% in 2019, down by 9.7%. This is mainly because of the optimization of the effectiveness of the expenses. For management expense, it is slightly down and roughly in line with last year's level. In terms of operating efficiency indicators, inventory turnover days increased from 152 days to 157 days. This is mainly because of the stocking for Chinese New Year as well as the stocking for some of the rare materials. Account receivable is down by 2 days, so we are speeding up the speed of collection of payments, and account payable has increased by 24 days. This is thanks to some of the change in the purchasing agreement to give us a longer payment cycle. Looking at 2019, overall speaking, some of the summary points. The first one, for high-end product. In our baby milk formula sector, goat milk, this has been a good growth point, and it is enjoying a growth of 60%. We are eliminating the medium and low-end products and focusing on high-end, and it has done very well. In terms of adult milk formula, Yourui, this middle-aged and elderly product, has been launched, has performed excellently. Since last year, we have also put out advertisements as well as promotion activities, and its growth has rocketed by 900%. Its growth speed, you can see since its launching, is very fast. In addition, our brand image continues to improve in 2019. We have signed with some top celebrities, Yao Chen, Huang Jingyu, Zheng Kai, Li Jianyi, et cetera. These celebrities have helped us to improve our brand image as well as to help us improve the purchasing from their fans. In addition, we have also utilized authoritative media such as CCTV, digital media such as Alibaba Cloud, and we have worked with ING to invest in Feel the World, the IP, and utilized social media to help us spread the word. With this, our brand awareness in the formula sector, I believe that we are ahead of our peers. The third part is our e-commerce. E-commerce channels, we are seeing double-digit growth. In the past, traditionally speaking, we have done well. However, for the e-commerce part, we have not done enough. In 2019, we have also planned with the e-commerce, and we have seen good growth. With Double 11, we have performed very well and a total growth of 142%, and Doraler, this brand, on that day, this goat milk brand, was ranked number one on Double 11 day. The above, I have shared with you the business performance of 2019 as well as some of the summary of our achievements. Now I am going to talk to you about 2020 outlook. First of all, let us take a look some of the challenges that we face in 2020, as well as the opportunities ahead. In terms of challenges, there are two parts. The first one is the birth rate. In 2019, it reached 14.65 million. This is lower than 2018 and slowly stabilizing. If we look at the industry, I believe that we have entered into the new era that people are fighting for the incremental bits within a stabilized market. In the meantime, in the market, for the foreign brands, they are also going into the third and fourth tier cities, and the top brands are also improving their investment into the market to fight for market share. For the small brands, they have started fighting the price war on different channels. Of course, we are also seeing some market opportunities. The first one, we have seen that the consumption continues to upgrade, including premium and super premium product lines. Organic goat milk categories continue to develop at a very fast pace. In addition, with people's awareness of health improving, we are also seeing the middle-aged and elderly nutritional food sector is growing very fast. In the meantime, we have also witnessed the rising of the domestic brands, and within those born in the '90s and after 2000, they have become very accepting of the domestic brands. With the support policies from the government, we are seeing that these are bringing very good opportunities for our domestic brands. For 2020, our work, we need to focus on two parts. One is focus. Through focus, we would be able to build the trend, establish our advantage. In addition, we also need to work through innovation to improve our efficiency, to improve our organizational and operational efficiency. For focus, we are focusing on brands, focusing on the core areas and core regions. First of all, on brands for formula, we will focus on Reeborne, this brand. In the past, we have invested very diversely, and from 2020 onwards, we will focus on building star brands. In the meantime, for subcategories, organic and goat milk, based on the good momentum growth in 2019, we will continue to sub-categorize it into organic and goat milk categories, and both categories are growing very well. In terms of milk powder for adults, we will be focusing on Yourui. This brand is something that we are looking at to further improve the pie in the market, and we want to see quality growth. Its growth margin at the moment is smaller than the baby formula. So we would like to see quality growth. In the meantime, we also have a nutritional food product being launched this year with a Blue Hat sign, and we will continue to expand our drugstore channels. So that is the focus on brand. Another one is focusing on areas. We will focus on major areas that we work on. You can see that with the slowdown of birth rate, and actually, basically, we are fighting for market share in a stable market. We need to make sure that we can grab more market share, and we also need to make sure that we can cover the whole national online cities. In 2019, we have a map plan, and we will continue to roll out this program. Through full market coverage, full channel coverage, full product coverage, as well as full media coverage, we would be able to establish our advantages. We have already carried out some very detailed planning. Three focuses. The third one is focusing on channels. We will be focusing on two channels. One is on e-commerce. E-commerce channels for domestic brands, its percentage is relatively small. Yashili, in 2019, even if we have seen high growth, but still, the total percentage is relatively smaller. In 2020, we hope that we would be able to improve the double-digit growth to triple-digit growth. Second channel we are focusing on would be the franchise mother-baby system. At the moment, we account for 70%, and I can see that in the market, we have seen improvement in 2019. We need to continue to build on this step by step and to work well in the mother-baby system. We will be working with the local franchise systems and to work on long-term strategy cooperation to realize the sales of all categories. In terms of innovation, there are two things that we are doing. The first one is to streamline our BU. We have divided the Yashili Group into three BUs: domestic brands, imported brands, and nutritional products. In the past, we had eight business units, and now we have streamlined to three so that we would be able to better integrate our internal and external resources, as well as improve our negotiation abilities. In the past, we had eight BUs, and each BU is very small. So when they go out to negotiate, they actually do not have a lot of say. Now that we have made that into 3 BUs, we can improve our negotiation capability. The second part is to solidify our business units. In 2018, we had sales business unit, and we have turned that into a production and sales unit all in one. We will focus on deep diving and streamline and devolution to activate the innovation and creativity of the business units so that those who can hear the thunder of the bomb can make the decision. This is with regards to the innovation. In terms of model innovation, in 2020, this is something that we will be focusing on. We will be looking at empowering distributors, digital empowerment. With the traditional business, we also need to look at the new business, the digital empowerment. In terms of the digital empowerment, based on our thinking, one is with the characteristic of the current age, everything has gone online, everything has become digital. So in order to have better connection with the consumers, we need to follow the trend. The second is because of this outbreak, we have seen a lot of our offline activities were no longer able to go ahead. Because of this outbreak, it has made us realize that we need to go through the digital empowerment so that we would be able to empower the consumers. We will be empowering from 3 aspects. One is distributor empowering, through realizing the digital management and whole chain route, and to help our customers to improve their operational capability. With respect to the stores, we will have a WeChat mini program, which can deliver products to the homes of our consumers and to improve our coverage and to improve the repeated sales of the customers. In terms of consumers, we have a Graceful Mother Association, and this association will provide excellent member services to our consumers. To give them expectation ahead of the experience, change during the experience, and broadcast our brand after the experience. We will be having very good interaction with our consumers. In the meantime, we have also conducted some online master classes and live stream classes. You can see we are working hard on building the Yashili online platform. This is what I have to share with you for the strategy outlook for 2020. I have been in Yashili for about 2 months, and our team is full of fighting spirit. I hope that you can all believe that in 2020 we would be able to complete the task given to us by the board. Thank you. This concludes my report. Thank you, Mr. Yan, for your presentation. Now we will move on to Q&A. First of all, we will take questions in Chinese, followed by English questions. If you would like to ask questions, please press star one. Or if you would like to cancel your request, then again, please press on the keypad. Now we will start to take questions. First question, Wei Xiaopo, Citigroup. Please go ahead. Good morning. Good morning, management. Can I ask one or two questions? I ask two questions. First, this is a broader question. Just now, Mr. Lu talked a lot about work done during the epidemic. For example, giving support to upstream and also the management system. Now, during recovery progress, how much time will be needed to achieve a recovery? Concerning change in consumers' behavior and also sales and marketing, which categories will recover faster, which slower, and how much cost or price would you need to pay in order to achieve recovery? When can you resume normal? Now, for your business results, excluding Junlebao, can you share with us the results of your organic underlying business excluding Junlebao? Thank you. I believe there will be subsequent questions from investors on this. About the epidemic, our expectation is as follows. In the first half, the impact will come to an end. In June, we believe that our business can fully recover. This means that in the second half of the year, we will be able to realize double-digit growth. For our operating profit margin, it will continue to improve on a year-on-year basis. For the first half of the year, impact on revenue happened mainly in February and March. There is a gradual recovery process. We believe that in the second half it will go back to 90% and above. In terms of revenue, there will be a slight decline. That is the impact on our revenue. As regards our profitability, in the first half, there are some one-off impacts on inventory. There is a decline. In February and March, the total milk supply has suffered from the loss. There is also one-off donation and epidemic control work. Some expenses were incurred. In the first half, profits will see major impact. That is the outlook about our first half and second half. That is my answer to your first question. Second, you asked about specific business segments. I think the biggest impact is on our room temperature products. As of the end of March and April, while most of our businesses had resumed up to 100% for fresh milk, the recovery is even faster. We have already built a cold chain. For fresh milk business in April, it will go back to a growth trend. More impact will be felt for room temperature products in February. For liquid milk, it is down 30%, almost 30%. I guess it will be a decline by 30%-40% on the whole. I think the actual decline will be bigger than what we had already seen. I think this is a guidance for the whole year. For the second half, it will be low-teen OP margin. Leveraging. There will be further improvement. Okay? Can you comment on the second part? Let me answer the second question. Last year, for Junlebao, it was as of November 19. In terms of consolidation, in the 2019 report, it also includes Bellamy's December result. If Junlebao and Bellamy's are both excluded, then our revenue growth is 14%. GP margin is more or less the same as last year. Operating profit margin is also more or less the same as last year. For net profit margin, Junlebao profit is CNY 170 million. That would be excluded. Can I follow up for the whole year? What is your expectation about milk price? Just now, we were given some points about sales and profit. What is the assumption on milk price? You mean 2020? Yes, overall milk price in 2020. Regarding milk price, originally, before the epidemic, our original estimate is that milk price, comparing with 2019, would see a slight increase. However, in Q1, since the outbreak of the epidemic, the situation changed a lot. In Q2, Q3, in February, March, milk price continued to fall. There is actually a bigger supply than demand. At least in Q2 and Q3, it is not. For second half, after business resumes normal, I think there would be increase. In the second half, there would be increase. I would like to repeat on the increase line, just now, with respect to the organic and goat milk that there was a mistake. For organic milk in 2019 compared with our report, it is in line. It is up by 40 basis. Thank you. Thank you. Next question, Kevin from JP Morgan. Please go ahead. Thank you, Mr. Lu and Mr. Zhang and Willow. I have two questions. This first one is a small question. Junlebao in 2019, its revenue, what is it? This could help us to look at 2020 model. Second, with respect to milk formula, if Bellamy's, in July, if it would be able to go into mainland China, what kind of strategy do you have for this brand? Would you be working separately from Yashili or working together with Yashili? Would you be focusing on third, fourth-tier cities or first and second-tier cities? In addition, with Yashili, for the mother-baby channels, and you have a ratio of 70%, so it seems quite good. For 2020 compared with 2019, what is the growth indicator? For the first question, I will quickly answer this. Junlebao in 2019, it is consolidated into our balance sheet, and it is CNY 11 billion, and the profit is CNY 117 million. I will answer Bellamy's. For Bellamy's, at the moment, we expect that for the whole year, it would enjoy a growth of 20%. This is for their business. This situation, we expect in the second half of the year, it will go into the offline Channels. At the moment, Bellamy's team, they run very independently. In Bellamy's China, they have an independent team. We are also helping Bellamy's at the moment to establish an even stronger offline team. This offline team will be independent from Yashili. For Bellamy's, main business would come from first and second-tier cities, and mainly coming from online, and it is very strong. Bellamy's, at the moment, its online market in organic milk ranks top 3, so it is very good. Bellamy's baby food this year, we have also seen great results at the moment. Regarding Bellamy's, for offline, we have a low expectation. Let's say, without any promotion of offline, I still believe that Bellamy can achieve a growth of above 10%. So I hope that Bellamy's in 2020 will be able to contribute greatly to the group, and this is on Bellamy's. In terms of Yashili, I will pass it to Mr. Yan, and please take this question with respect to the channels. Thank you. For Yashili, I will answer the question. In 2020, Yashili will continue to phase out the low growth margin and low sales product and continue to focus on the high growth and high-end products. This has always been our strategy. Based on this, in the first half of 2020, we will continue to complete this work. In the first half of this year, we will see perhaps a 15%-20% decrease. For the whole year, we believe that we will see low teen growth, and overall speaking, we will see growth of Yashili, and this is at the moment what we have planned for Yashili for 2020. Thank you. Mr. Lu, I would like to follow up. If we look at Bellamy's China strategy, if we look at Feihe, Aioio, and He Songya, et cetera, they are doing very well. So do you think this business model is slightly different from Bellamy's, and how would Bellamy be able to compete with them and to improve its market share? Well, I think Bellamy's core, again, is its brand as well as the product advantages. This is something that the other brands would not be able to have. It is organic, it has a huge baby food section, and as well as their online word of mouth and reputation. We know that after the outbreak, the reason why Bellamy's is going well is because its sales is mainly online, and a lot of the sales are moving online. So I think that this is very strong. In addition, with Bellamy's continuous offline expansion, I think that Bellamy's model is similar to that of Danone. It is cross-border, a high-quality brand, and great reputation online as well as offline expansion in the meantime. I think that they have very obvious advantages. In addition, the baby food can work in tandem with the baby formula. At the moment, I believe that Bellamy's with China, we need to build a very strong team for developing its business. For the other aspects, I do not think that they have anything that they are not quite good at. Compared with other domestic brands such as Feihe, I do not think that they will be competing with them on the same level. They will mainly be competing with the 45% of the cross-border multinational companies. If we are fighting for those consumers of the cross-border multinational companies, Bellamy's will be in the advantageous position. Thank you. Thank you. Next question. CLSA, please. Thank you. Thank you, management. Congratulations on your excellent results. I have two questions. First, during the epidemic, in terms of community sales, you have been doing well, especially in Wuhan. You have got an app, and I would like to ask. I have looked at your business model, and it is quite similar with a previous model about working or selling in the villages. What are the differences and similarities? Then, if you refer to the previous Wei Xiang experience, comparing with your current business model, what can be taken reference from? Is this a sustainable business model? In relation to profitability, what will be the implication about profit margin of this model? My second question is about chilled yogurt. Mr. Lu, in the past said that in the first half, the growth rate of this segment is quite bad. Mr. Lu back then said that as a leading brand Mengniu might not have done enough in this segment. For the whole year, growth is already very good, but it still cannot drive growth of the whole sector. What do you think of the overall outlook of chilled yogurt? In the coming two years, in terms of R&D capability, what have you done, and what are some areas of enhancement? These are my two main questions. One final minor question. There is going to be a delay from 2020 to 2021. Your contract with the national authority will start next year. What will be the impact on your operation? Is this like an accident for you? Let me take the third question first. The first question will be taken by Gao Fei, because I think he is in the best position to talk about that. The person in charge of chilled yogurt will take that question. To us, you cannot really say that it is a very big favorable development. Our cooperation with Olympic is a long-term one, so no matter whether we are talking about 2021 or thereafter, our cooperation with the Olympic Games will still be a favorable development for Mengniu. Concerning the delay to 2021, we still have to look at the detailed plan. We do not know exactly the detailed plan as regards to what will happen in each month. Overall speaking, especially when it comes to the epidemic, it is a good arrangement for the Olympic Games to be deferred, especially with regards to the athletes. Mr. Gao Fei will talk about community sales. Good morning. With the epidemic, consumers' behavior, shopping behavior, have changed significantly. As a result, our online business has grown fast. When it comes to different, for example, online platforms for food delivery or purchase of foods, they have also seen good growth. In the past, when it comes to traditional businesses or enterprises, they did not develop a lot of this channel. Now, we have already seen this new development for 2-3 years, and this sector has been developing fast. In the past, we already adopted the community sale approach, especially when it comes to WeChat, but then we did not extend it to some very remote small communities. This trend is developing fast. We started in early February, and within a short period of time, we accumulated a lot. Up to now, there are already 90,300 odd this kind of participants. I think the community sales is really very influential because people now stay at home. They do not go out. In February, I think there are 8-10 points or outlets in this business. What do I think of its future outlook? I think for this model, it is a very good model because it is closest to consumers. In the future, I think this is going to be a channel to stay. It is going to be sustainable. However, for this channel, it will not be growing as fast as in the past 2 months. In the future, this is going to be a sustainable channel, and it will be maintained. If you look at the overall value chain, it is closest to consumers. It is a channel that is most convenient. So far, we have not encountered any problem on this channel. When it comes to launch of new brands and also sales of products, I think it is going to be a channel that we can capitalize on. Thank you. All right. Please comment on chilled products. Okay. Thank you for your question. I am Rong Youping, responsible for chilled products. In 2019, for chilled yogurt, growth rate has not been good. For this segment, we saw a negative figure. The major reasons behind is that for this particular segment, there is still not enough degree of concentration. There is not really big focused brands. At the same time, the products are rather homogeneous. Very often, competition is still based on price. If you look at our core functional value proposition, in the sales and marketing process, it is still not well conveyed to consumers. In other words, the health value of our products has not been fully released. In 2019, Mengniu's chilled yogurt had exceeded CNY 10 billion in terms of sales. It is not only a numerical change, it is also a qualitative change because we are talking about CNY 10 billion. That means our brand has moved on to a higher growth. In the future, in building our chilled products, we are going to exercise greater strength. For 2020, we have a very complete plan because we have seen big change, especially arising from the epidemic. In the process, we have observed some phenomenons. Now, if you look at milk and dairy products and also yogurts, we have seen a lot of experts and doctors giving advice. The main point is that, by improving people's immunity, then they would be able to better guard against or protect themselves against epidemic. Also, even after infection, people's recovery capability is also closely related to immunity. I think more publicity and education work should be done about how to enhance people's physical fitness as well as their immunity. I think more emphasis will be placed on people's living quality and health enhancement. From this, we have identified a business opportunity. Our core chilled products or chilled yogurts, one is focusing on yogurt, and another is focusing on functional value. Both can enhance immunity. We have seen actually improvement in sales of these two brands. Actually, we have seen almost 100% growth within a short period of time. When it comes to our Champion Yogurt, there is also very positive growth. I think in the future, if we are able to develop these product categories or brands in a better way, then we can lead the industry and also this yogurt segment. When it comes to channels, for this time, you can see that there is more growth in tier 3, 4 cities. Last year is more than 15, so while we had enhanced our cold chain strategy, we want to enhance growth rates by doing this. For yogurt, I think we should possess some kind of strength. We need to make sure that the products are fresh, and we have to ensure quality. In terms of branding, all the way to sales for chilled yogurt and also overall business development, what I said just now, about our work in relation to chilled yogurt. Thank you. I have a follow-up. Just now, Mr. Gao, when talking about new products in 2019, what is the share of your new products of the total? You mean 2020 or 2020. Right. 2019. Of your overall total sales, what is the share of your new products? Right. Thank you. If you talk about new products, around 10 points. In the future, you look at the share of new products. Now we are innovation and new products driven. I believe the boost from new products will be very significant. That is in the perspective of chilled products. For room temperature products, I think new products account for a share of 15%. Right. Thank you. Thank you. Next question. Morgan Stanley. Thank you, Mr. Lu. Thank you, management team, for your introduction. I have two questions as well as a clarification on one number. The first one. Looking at the sales guidance for this year, what is your overall strategy for the company? For example, in March, April, as well Q3 and Q4, what do you think the competition landscape is like for this year? Do you think is it possible that the competitors would all want to fight for more market share, which will lead to more price wars and reducing their prices? In addition, for the low teen digit growth for the second half of this year, what is your view on the industry? This is number one. Number two, again, this is related to new products for 2020. What are the new focuses, especially for compound calcium? This is also a new product. Do you have a target this year, together with the compound calcium product as well as some other products? Finally, some figures. Mr. Lu, earlier you mentioned that the profit margin for second half of this year will be increasing, and this will be compared with the second half of 2019 or the previous whole year. For Bellamy's business, what is the sales percentage accounting for? Those are the two figures that I'm seeking clarification on. Thank you. Perhaps you could answer the figure question. I'll answer the other two. Okay. I'll take the figure question first. Lilian. Second half of this year, the improvement of growth margin would be compared with the same period last year. So same period, second half of last year, not the whole year. In addition, Bellamy's. Bellamy's percentage, compared with last year, is 20%. I'm asking about its China business. At the moment, a lot of their business is in China. Basically, you purchase it through different channels. A lot of sales happening in Australia is also being sold through representative agents and to China. So these are the figure clarification. In terms of I think actually what you are concerned about is the price war. At the moment, looking at it now, in a short period of time, in February and March, including April, in the market, of course, you will see people giving out discounts. This will be the digestion of inventory. So originally, for the Chinese New Year, people had high expectations, but now that sales did not happen, so people have more inventory in their stock. I believe that large companies, in a short period of time, they need to digest this inventory. Of course, that will translate into some sort of discount at the terminal and sales. I think this is more about how you look at it. This is not because of competition. This is because that they need to maintain a healthy level of supply as well as manufacturing, et cetera, and this is simply managing the inventory. I believe that this is only short-term. Long-term wise, for second half of this year, I think that it would be similar to that of last year. Last year, we have seen that there was competition, but the growth in the market itself is actually quite good. I believe these few companies, including our competitors, from a growth perspective, I believe that we will all resume to normal, and which will be driven by the growth and will come back to normality. So I don't think that there will be large-scale price wars. However, in February, March, and April, perhaps in terms of digesting the inventory, you might see some discounts, promotions, et cetera. These discounts might be higher than the normal level, but this is mainly for digesting the inventory. Once the inventory level goes back to a normal level, I don't think that within the channels, we will be seeing price wars or discounts being offered anymore. Thank you. Also, your new product question with your Dream Cap series and your strategies and the Dream Cap, do you have any specific targets that we can reference to? Well, Gao Fei, perhaps you can take this question, but for this Dream Cap is mainly for UHT and Milk Deluxe. Well, this is Gao Fei speaking. To follow Mr. Lu's answer, people are worried about price war, but I think that going forward, the growth comes from innovation. So what we focus more on is the product innovation and to look for growth in that area. As Mr. Lu has introduced, this is only a short-term issue, and at the moment it's all very passive. So when we talk about new product for UHT, the few new products, one is the Dream Cap. This product, we hope that it can account for a significant percentage of Milk Deluxe series. For Dream Cap, we believe that we have been able to launch in an advantageous position, and we believe that we'll see good development in terms of the sales and price. Second, some of our other new products, for example, the Skinny Waist, et cetera, these are all being sold very well. Overall speaking, we think that for 2020, they will account for about 15%, and we would be able to grow our business based on new products. Thank you. 15%-20%. For Dream Cap, it will be able to take about 15%-20% of Milk Deluxe. Because of time, now let's take the last question. Please go ahead. Mr. Lu? Greetings, management. I have two questions. First, concerning your revenue plan. The first half is now over, basically. If we look at the first half of next year, what will be revenue growth? If there is no epidemic, if everything is normal, then next year, are you going to see double-digit CAGR in the first half of next year based on the situation? What is the outlook of the growth rate for the first half of 2021? My next question is about yogurt. This year, you did very well, CNY 700 million revenue scale. If you look at the long term, like three to five years ahead, will this segment become a bigger segment? When it reaches a very big scale, what will be the profit margin for this segment? So these are my two questions. Well, you want a 2021 guidance now. Let me put it this way. It is a bit too early to give this guidance. However, I think that in the first half of 2021, the normal trend in the second half of 2020 will continue into the first half of 2021. I think we can have this expectation. Our strategic goal is that in the coming five years, every year, we hope to achieve double-digit growth. That is our strategic goal. I believe the epidemic impact will only be temporary. So that's my view about growth. Then concerning fresh milk. Well, for fresh milk, I think that we have to double further. That is, all the way reaching CNY 5 billion-CNY 10 billion. Now, right now, our goal is that for three consecutive years, we have to double. This is the second year, next year, where if this year we can achieve the goal, then next year, we still have to double ourselves. There is the market, and we do have the capability. In this business, if you look at our high-end Shiny Meadow brand, where at the end of last year, we reached 30% already. This year, the goal is to be at least 35% in share of our total fresh milk business or even higher. For Shiny Meadow, the GP margin should reach the GP margin of our high-end milk products. So when our scale reaches CNY 5 billion or above, then our profitability will be quite substantial. Thank you. Mr. Lu, you said that it would be quite considerable, quite substantial. What do you mean specifically? Will it be better than your operating margin? In the short run, we hope that we can approach our OP margin. Short term means that before we reach CNY 5 billion. When it reaches CNY 10 billion, of course, we have to look at the milk price at that time. We have to look at the overall milk price trends in China to determine that. Right. Thank you. Thank you. Our conference call will come to an end here. Thank you very much for your interest and support for Mengniu and Yashili. Today, in the evening, the webcast or the presentation content will be uploaded to the website for your viewing. 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