Earnings Call: H2 2020

Mar 25, 2021

Investors, ladies and gentlemen, good morning. Welcome to the 2020 annual results presentation of China Mengniu and Yashili. This meeting will be conducted in Mandarin. We have arranged English simultaneous interpretation. I am Wu Liu Yin from Investors Relations Department. Let me introduce to you our management. From Mengniu, President and Executive Director, Ren Yi Fan; CFO, Zhang Ping; Senior Vice President, Mr. Gao Fei; Vice President, Mr. Wen Yongping; President, Yan Xie; Deputy Director, Li Pengcheng; Company Secretary, Mr. Guo Wei Chang. From Yashili, we have Executive Director and CEO, Mr. Yan Zhiyuan; CFO, Mr. Chen Yi Ming. Now, let me go through the agenda for today. First, Mr. Wu from Mengniu will go through the 2020 full year results and business development. After that, Mr. Yuan from Yashili will go through the 2020 results. After that, there will be a Q&A session. You may dial into the telephone system to ask questions. Now, may I invite Mengniu management to present Mengniu's 2020 results. Yes, thank you, Willow. Investors, friends, good morning. Thank you very much for joining us online at this Mengniu and Yashili annual results presentation. Because of COVID-19, once again, we can only meet each other online and present our 2020 results. I guess you already have our materials in your hand, so let us directly turn to financial overview. If you look at revenue of the listed company in 2020 and 2019, revenue was down 3.8% because we sold Junlebao, and there was some impact from there. Our GP margin was at a stable level. In fact, there is an increase by 0.1 percentage point. Operating profit margin, 37.6%, so it is down from last year because of the pandemic. Sorry, it should be 4.6%. Earnings per share is also down. We are able to better reflect our performance. So let's take a look at our financial results on a comparable basis. In 2020, we successfully overcame the challenge of the pandemic. Last year, starting from Q1, our revenue growth and also profit improvement are very healthy. Our revenue came from both product structure and sales volume. So on a comparable basis, despite the pandemic, revenue was up 10.6%. This is a very good performance. Our gross margin was rather stable, so there is 0.1 percentage point. This is because of price increase of raw milk. However, if we only look at second half, comparing with the same period of last year, our GP margin expanded by 20 basis points. Raw milk cost challenge can be digested. This is mainly because of our multiple product structure with UHT, fresh milk, and chilled products. Our discount rate was down for white milk products. So you can see that our profit margin is still expanding healthily. Operating profit margin was down. As I said just now, this is mainly because of the one-off expenses caused by the pandemic. Without the pandemic, if we exclude these one-off expenses, or if we reverse these one-off expenses, our operating profit margin expanded. So later on, I will elaborate more. Concerning other finance expenses, well, there is an improvement. In the future, in order to better reflect our business trends after the pandemic, I would like to share with you our performance in the first half and second half. So you can see that in the first half, our business growth was shown in the interim report. In the second half, business growth was 11.8%. In the second half, results were quite good. For the whole year, 10.6%. If you look at our operating profit margin as such as now, there is an increase. In the second half of 2020, operating margin, comparing with the same period last year, expanded 0.6%, 60 basis points at 5.4%. This is better than our expectation. We have taken into consideration the impact of milk price increase and also our overall product structure, and also the lower discount rate. Under the pandemic, we are able to achieve these results. This is not easy. In the past four years, if you look at our development, while it had not been fundamentally affected by the pandemic, after the pandemic, our business recovery and the recovery of our profitability have returned to a normal level. I need to thank all 40,000 employees of Mengniu for their hard work and for their brave determination in facing up to the challenge, and all our supply chain working partners. Thank you for helping us achieve the result and our target. Now, I would like to talk about a breakdown of our sales revenue. If you have our materials in your hands, please turn to page 8. Here, you can see our sales revenue, liquid milk, up 10.9%. This is in line with our overall revenue growth. This is mainly because of strong growth of UHT milk and fresh milk. For our fresh milk brand and Deluxe, they grew 20%, fresh milk drink, up 12%. This is for the whole year, even including the pandemic period. For pure yogurt, there is positive growth, and then for fresh milk, triple-digit growth. For chilled yogurt, there is a decline, but our decline is lower than that of the industry. The industry experienced a double-digit decline. Now, after the pandemic, there is a growth in dairy product demand. At the same time, we kept on building our brand and enhancing our products, expanding our channels, and so on. For our ice cream products, we have changed the 2019 decline trend. In 2020, we achieved small growth. For formula milk, revenue is up 38.3%, including Bellamy's and Yashili's results. Our cheese also grew well. We have achieved more than 50% positive growth, and our scale reached CNY 1 billion. Now let me turn to the operational level. Our operating performance. Despite the pandemic, our operating activities and positive cash flow achieved positive growth. It is CNY 5.35 billion. There is an increase comparing with last year. Concerning our capacity investment, it is reflected in our CapEx. In the second half, there was fast business recovery. For the sake of the coming five years' development, our capacity plan in 2020 still followed our strategic plan. It was implemented. You can see that our CapEx was CNY 4.4 billion. This shows our newly built factories and production lines. The pandemic did not change our coming three years or five years strategic plan. On the contrary, during the pandemic, we implemented our strategic plan. Next page, our selling and administrative expenses. Let's take a look at the first half and second half. For the pandemic, we had bigger one-off selling and marketing expenses. But in the second half, it resumed normal. It is actually flat. For administrative expenses, it came down to 4.1% from 12.3%. Of course, there's a reduction in business trip expenses because of the pandemic. For our staff income, it is not lower than 2019. In fact, it is slightly higher than 2019. This shows our business performance. Next page. Our operating efficiency. As in the past, there is different degree of improvement if you look at receivables and payables. Inventory turnover slightly increased because during CNY 2020, we need to prepare our products, and so inventory growth. I have gone through our financial numbers. I believe you have a very good view of that. Now, I'd like to spend some time talking about how we can achieve the financial results in 2020, and I'd like to talk about our company strategy as well. First of all, in 2020, most of our business was surrounding combating the pandemic and focusing on recovery after the pandemic, and we've also taken measures to develop our new retail channel, strengthening our client base and our new brand in new retail and our digital platform, including the penetration to towns and the villages, have been developing very well. What is more important is that in 2020, we have accelerated the digital project of the group and the digital transformation model. Our R&D has been developing in every view, especially room temperature products, including Niuniuhui, Qianniuhua, and other digital applications. These measures have boosted our expansion in the offline branches and the integration of offline and online business, and also the efficiency of deliveries. We have been very efficient despite the pandemic. Now I will talk about our business by segment. Our room temperature business has double-digit growth for five consecutive years, continuing to lead the industry. In terms of channel transformation, we have achieved a lot with a higher market share and premium brands, including Milk Deluxe, has recorded very good growth, and we have a 20% growth in white milk and other drinks, including the fruit milk drink, has recorded a 12% growth over the year. Our product innovations have been used, Deluxe, premium yogurt, and other new products, as well as our new fruit milk drink product. They have been doing very well in 2020. Let's now look at the other highlights. On the next page, you have our two segments of fresh milk and cheese business. We have achieved 100% growth in net revenue over consecutive two years, with our market share increasing to 11.2%, increasing by 4.1 percentage points. We were ranked number two in the industry in June. 81% of our fresh milk can be produced on the day, and they can be put on the shelf of the supermarket on the same day. We have consolidated our premium brand position in the market. We have achieved over 150% growth. Cheese also has made breakthroughs with three-digit growth in revenue and net profit, and the results are better than our expectations, especially in retail channels. We have high grades. Despite the pandemic, our 2B business has been going on very well, and we are pretty positive about the outlook of cheese market. We have invested in new brands. It's a strategic investment. I believe the synergy in the future will help us achieve the leading position in the cheese market in China. Apart from the two businesses, the other businesses are also improving, especially in ice cream and chilled products. The coronavirus pandemic has impacted our chilled product, but we continue to break through in innovative ways with new products. For example, zero sugar, low-sugar products, and we focused on key brands and key products. Ice cream, especially in modern channels and new retail distribution channels, we have seen a better improvement in terms of sales and operating profit. We expect that in 2021, there will be a clear upgrade of the product structure of ice cream business. Let's look at milk powder business. I'm sure you are paying close attention to it. Yashili started to switch its strategic position and product mix in 2020. In 2020, the growth and net profit are better than expected. I'm sure Julian will share with us. The overall year growth is not optimistic, but in the second half of the year, we have recorded a 20% in net revenue, and we focused on regional market and regional baby care distribution channel, and we built a very good foundation. We acquired the Bellamy's business in December 2019, and we have been launching good products like super premium A2 milk formula and organic A2 gold milk formula. We have established the full matrix of premium infant formulas. In offline channels, we have pretty good achievement. The Australia cross-border e-com channel was affected by the pandemic, but domestic is highlight and with very good growth in organic products. Overall, the business of Bellamy's has met our expectation. The online cross-border business was affected, but other distribution channels are better than expected. We believe that in 2021, Bellamy's will continue to deliver very good performance. I think I have pretty covered all the business units. Besides that, I think international investors are closely watching our steps in sustainability. In the three years down the road, we will work on environment, society, and economy with 12 topics and 27 initiatives, so we can implement measures to honor our promise and responsibilities to the environment and society. We have published Mengniu Dairy Quality Assurance White Paper, and we have conducted pilots for measuring factory carbon emissions. We also established a welfare system in all the dairy cow ranches in China, and we have made clear our target and path for emission reduction. In sustainability, we were recognized by the capital market. This is shown by the fact that we were selected to constitute the stock of the Hang Seng Corporate Sustainability Index and Hang Seng ESG 50 Index in August 2020. Now, I'll spend some time talking about our business outlook for 2021. First of all, over the past 21 years, we've made huge progress. An important reason is that we rebuilt our corporate culture. In the end of 2020, we published the new corporate culture document, and this is a summary of our experience over the past 21 years. It's also to upgrade our corporate culture for the future. This is why we published our new corporate culture and strategies, so we will boost future development with a new culture. Our new mission is focused on nutrition and health. To deliver a drop of happiness for every moment and every day to more people. The vision is to thrive as a centennial health and nutritional food enterprise that is consumer-centric and innovative. Our core values are Mengniu spirit. We are born to excel. We constantly strive for self-improvement, so we can work on our value chain and supply chain, and every partner can realize their value. In the end, we are going to build. These core values cannot be put as a label on any other company, as they can be only put on us. We work together with 30,000 employees in nine months, and we produced these new corporate values and cultures, and this is result of teamwork throughout the group. I believe these core cultures and values, and cultures are really deep-rooted in everyone's heart. Now, let me talk about our mission, which is to create a new Mengniu by 2025. In business level, we will continue to create. We created a group of CNY 80 billion in the past 20 years, and in five years, we are going to create more miracle. We are going to create even better business. You can see in room temperature chilled development businesses and milk, we have very clear plan, and we have very clear strategic plan for every business unit. In simple words, in business, we are going to focus on dairy industry, achieve high-quality growth with steady profitability improvement, because we believe there is more room for development in China's dairy market and better development opportunities. At the same token, to realize our strategic objectives, we will continue to build up five core capabilities. The first is digitalized marketing. All digital supply chain, marketing, consumer operation, et cetera. Mengniu's digitalization will be brought to a new level. Second, R&D innovation. We focus on all life cycle, the core of R&D systems, and we will focus on the deliverables of innovative projects. We have acquired good project to make sure that the raw milk source is good. We rely on Modern Dairy, Shengmu, and Fuyuan, the three dairy companies. We can work with big and small ranches to achieve win-win cooperation. In terms of acquisition integration, we will enhance our post-acquisition management to maximize the output. These strategic goals must rely on our strong organizational capability. We will strengthen the talent pooling business with our strategy and continue to improve the incentive system and revitalize our organization. You may ask us, you have doubled your profit and your revenue, and you have secured your business, but what is the new things about your future development? I think we are new, because we are a leading dairy company in China, and we were going to boost the dairy industry in the 14th Five-Year Plan period. Looking forward, by 2025, what will Mengniu look like? Apart from financial indicators, I hope we can be a brand that is cherished and loved by the consumers, and it is going to be the consumer's first choice. Operation, innovation, brand, in all aspects, we will have good development, so we will be the number one first choice of consumers. Second, we will be a digitalized Mengniu, an intelligent and digitalized Mengniu, will bring us closer to the consumers at creating new business models, so we can break through. We can break the borders of this industry and become a nutrition brand with intelligence. Third, we are going to be an internationalized Mengniu. We will be international leading in brand, product, resources, and standards, and talent, as well as governance. We are not doing business in each country, but with global supply chain, we will be a truly international company, and then we can participate in international governance, be part of the sustainable global supply chain, becoming a leading company in dairy industry in the world. So our capability, governance, quality, all these aspects, we need to be at an international level. Fourth, a Mengniu with a strong cultural gene. So our mission is to have every drop of nutrition and benefit every life. So we will give full play to our spirit and compete with ourselves, and we will honor the four core values. Our corporate culture will be the sustainable emphasis for future company development. Last but not least, we are going to be a company with a strong sense of responsibility. We are talking about green production, responsible supply chain, and welfare for human beings are revitalizing the villages and township development of China. We will safeguard the common health of mankind and Earth. So I believe Mengniu, five years down the road, will be different from what it is currently. So not only financial indicators, but also the core values. In the end, we would like to give our outlook for 2021. I know you are pretty concerned about the latest trends in dairy industry in China. Just to sum up, currently, there has been some imbalance between demand and supply in raw milk in China. So that will drive up the raw milk price. Second, we know that the consumption has been vibrant to the pandemic, with a faster growth of dairy industry. We also see that the market has great potential in lower tier cities. In the end, I would say marketing and brand communication model will change due to the changing lifestyle, more digitalized and more demanding. So that is why in 2020, we will continue to enhance our digitalized initiative in improving our digital capability. We have a few core strategic goals. Our long-term strategic goal will not change, and we will continue to boost our core strength. First, we have multi ways of sourcing, which will offer strong Emphasis for our future development. I believe you remember that we invested in Modern Dairy in 2017, and we made it very clear that we would develop premium milk, fresh milk, and these high-quality sources from Shengmu, Fuyuan, and Modern Dairy. They supported our business development. Second, we will focus on mother brand and core brands of each product category and continuously upgrade brand power. Third, we will strengthen omni-channel marketing and sales. We will speed up emerging channel development and channel penetration. As you could see, in 2020, our business penetrating to townships and villages have recorded very good business. So we are building a good brand in lower-tier cities. Fourth, we will upgrade our overall R&D innovation to meet the differentiated demands of different consumer groups. So through innovation, star product in room temperature, drink fresh milk, chilled ice cream, we will have innovation in every category. In 2021, we will continue to promote the innovation business. Last but not least, we will speed up digital transformation to build a completely closed loop in digitalization. We have a special task force led by myself, and we will boost digitalization in room temperature, chilled products, and premium brand, et cetera. I have gone through the presentation on our business performance. In simple words, to sum up, I think, first of all, the pandemic has not affected our business much. However, despite the pandemic, we did a better job in brand and innovation and realizing our strategic goals. I believe we will come out from the pandemic even stronger in terms of business development and improved profitability. That is why for the year of 2021 and the five years down the road, we will be fully confident and our team will be in line with these strategic goals, and they will carefully implement them. In summary, I think we feel that all employees in Mengniu, driven by the corporate culture and the mission, will be fully confident for our goal to realize a new Mengniu in 2025. Thank you.