Earnings Call: H2 2012

Mar 27, 2013

Ladies and gentlemen, good morning. Welcome to the China Mengniu Dairy Company Limited 2012 annual result announcement. In today's announcement, would you please take note of this disclaimer? In order to offer you with a favorable meeting environment, would you mind tuning your mobile phone to the silent mode or vibrating mode? Thank you very much. First of all, I'd like to introduce the management team of Mengniu Dairy Company. Madame Sun Yiping, the Executive Director and Chief Executive Officer. Mr. Bai Ying, Deputy Executive Director, VP. Mr. Wu Jingshui, ED and CFO. Mr. Liu Shengli, our VP and CIO. Jasper, VP in Marketing. CAO, Mr. Lu Jianjun. Mr. Chris Kwok, Financial Controller and Company Secretary. Madame Ji Mei, Assistant VP in Public Relations. Ms. Wu Wennan, Investor Relations Officer. In today's meeting, we will have two sections. First is the result announcement. Second is the Q&A session. First of all, we would like to invite Madame Sun Yiping to announce the result for the year 2012, and she will bring us to the prospect of 2012 and of future strategy and planning of the company. We would like to invite Madame Sun, please. Respected investor and shareholder of Mengniu Dairy Company, good morning. I'm very pleased that after this 12 months, after I've been the CEO of Mengniu Company since last year, and at the same venue, I could meet you again. Today, we have brought together some new faces. Today, we have brought a new page in Mengniu. For our team, starts from the beginning up to now, we have Bai Ying, Wu Jingshui, Liu Shengli, and also Lu Jianjun. They have been in the management team ever since, and also now they are present in the new team. Now we have some foreigners added to our team. We have Jesper, he is being recommended by Denmark and being seconded here to be our VP in Marketing. Jesper has more than 10 years of experience, and he has been responsible for the worldwide category management in Denmark. Although he's Westerner, and also his height is much taller than us, he showed us that he has been drinking milk ever since he was very small, so that's why he is very tall. Next to me, I have Madame Ji Mei. She has been involved with Coca-Cola Company previously for more than 20 years. She just joined us for several months, and we also have Wu Wennan. She's from Investor Relations, and she's been communicating with all of you. She is the major person for you to communicate with the company, the press. With the new faces, and also with the proportion of the female and male genders, we are also adjusting the proportion too. We would like to provide more information about Mengniu current situation. Now I'd like to announce to you the result of last year. Half a year ago, I have made a review. Now I would like to give an overall annual review. In the year 2012, for our revenue, we have a slight decrease, which is RMB 36 billion. Today, our results with our team, and whether new or old faces, we'd like to present you with all the preparation work we have done behind the scene. In 2012, we have quite a major effect, that we have taken a very active action towards that change. We have a change down by 3.5% of gross profit. We have gone down by 5.6%, and we have paid a lot of attention to our product mix so that we could have better results for although, on one hand, the gross profit is affected, it affected our investment on the raw milk, but also our investment on raw milk will have increased. At the same time, the price of the raw milk has been increasing. For the overall supply of the raw milk, we have upgraded. We have upgraded our raw milk control to the ranch control at present. The overall milk source management of Mengniu is in the leading role in the industry. For the intensive production and the scale ranch milk source, we have reached 93%. At the same time, we hope that long-term, we will have a very good control on this. For EBITDA, we have been having a big impact. In the year, we have reacted and we have put more resources on the sales, so that within a short time our sales could maintain the level. With this action, I think it is very wise in 2012. In the second half of this year, we are aware that if we simply rely on extra sales to support our total sales figure, it will not supply us to move in the long term. In 2012, we worked very carefully about what is affecting behind the scene. For our market, we noted that we have conducted meetings with thousands of people attending to look at the future development of Mengniu. Because last year, we saw the market with a little bit of lack of confidence. We have in-depth analysis to look at the key factors affecting our growth. We looked at our brands, looked at our sales team, looked at our structure, and we realized that question. In the second half of 2012, after very careful analysis, we have initiated the organization change, because this organization change will match up with the market change. We have invited professional people to help us with the brand management. With this big change, in the second half of last year, we have organization structure change. At that time, we have this belief that we need to, in the month of November last year, that we could optimize this organization structure. In 2012, it is not an easy year for Mengniu. We need to quickly resume our team. We also have old faces, we have new team members entered. I think because of this, we do not have a very easy year. But now we have the team formed. They are on stage already. Although we are from a different culture, but we are very harmonious. We have existing staff who has been with Mengniu ever since the beginning of the company. For the new faces, especially those who have international company experience, they have learned the passion and quick response of Mengniu and joined us. For last year, it has been a challenging year. At the same time, it is also a challenge for us to accommodate the new organization structure. In the future, you are always welcome to ask more about us, about the team. For the results, if you look at the liquid milk, it occupied a major proportion. In 2012, the liquid milk took up 89%. In the future, we are thinking for this product mix, how to optimize it, how to improve it. If you look at liquid milk, the UHT milk revenue is $9,706 million, and decreased by 5.84%. The decrease is because of the basic white milk revenue drop. If you look at the competition is very severe for UHT milk, for high-end product under UHT milk, for example, Deluxe children milk, we have very good growth, which has been keeping the upward trend growth. If you look at this part, it proves that we have the capability to build high-end brands. If you look at the milk beverages, we have dropped by 3.3%. The major reason is because of Suan Suan Ru, which is a traditional product. But for UHT, we have a three-digit growth. This is the product where we focus on our brand of building this item. For Suan Suan Ru, we have a campaign together with the Hunan TV. We focus on the X Factor. We hope that with this new brand, we could sustain our strength in the market. With the Suan Suan Ru, with the upgrade of the brand, we hope that in the year 2013, it will work even better. For UHC, it has been performing very strongly in the year 2012. For the yogurt milk, we have been increasing. It has reached about $4.5 billion. That is one capability we focus a lot, which is the product structure. In the year 2012, we could maintain this upward growth from 25% to 27%. For the milk beverage, you can see we have three-digit growth. For this result, we can see that in the coming years, we will know which product we will focus on. In the market share, in Mengniu, we are still the number one in liquid milk market. When you look at the AC Nielsen analysis, we took up this percentage, which is 25.6%. For UHT market, we still rank first, which is 19.7%. For dairy product market was 19.11%. When we look at the sales team, we focus very much on the market share, and it is important item that we work on in coming days. If you look at the financial figure, we have a very robust financial situation. If you look at the overall indicator, we have been having a very stable, steady growth. We have sufficient cash, and of course, we will consider how to use this cash also in the first half and then second half. We are assuming the sales, and we have been having a very robust financial growth in last year. I would like to review in the year 2012, the overall business situation. In the year 2012, we have five major actions. The five major action cover the year 2012, the things that we have achieved. Time flies very fast. We have in the year 2012, there are major five actions we have completed. First is to optimize our organization structure. Second, rationalize brand category. Third, improve the milk source, the quality of milk, improve the quality management system. Fourth is strategic cooperation with others. I would like to tell you how we complete this five action. First, a lot of you are concerned for this super big company. If you would like to construct organization structure change, there must be a lot of effort to put in. Well, I have, together with my staff member and team member, have put in a lot of effort. We see that the barrier which will affect our sales growth, which are the factors contributing to this, and we have already assumed an organization structure that will help us to walk out of this sales barrier. The major change is, first, in our team management team, we are very clearly to define 12 different systems. One of which is the sales and marketing system. In the past, the sales and marketing system, the sales team for this organization structure, we have this marketing arm to be independent from the sales. We will have market-driven, market-initiated effort to bring the onward movement of the company. Second, in the past, we have a hierarchy of the structure. We have 5 or 6 different levels. It will affect the speed of our response rate to the market, so we have made change to it. Third, for our team, because our company is a very product-related company, so we have this product category reorganized. After reorganizing this product category into 3, so we could have a supplementary effect. For example, for ice cream, because with the lack of support in the past, it is not that favorable, but now it is being market-driven. How to integrate the resource to support our ice cream arm to have better result? In the past, for network contribution, network exploitation. We have improved on the big upward change or downward change of the chilled product or the UHT milk, et cetera. Fourth is to strengthen our function. Strengthen our professional capability. In the coming days, we notice that for our product, for our customer to the end user, end user to the consumer. These different movements, we need a professional team and professional capability to handle it. We will enhance professional capability. We have built this trade marketing and also sales. Also sales center, operation function, and also KA accounts, Department of that sort. For regional asset, we enhance the support to this different capability in the regions. We have this trade marketing team accounts with this, we could effectively support us from sales to the consumer, and how to communicate with the consumers. In the coming days, we will initiate our asset from the region. We have a unified market response. That for region asset, especially region consumer, this is asset that we will focus resources towards the major regions. With the 15th Congress session, I remember on the 8th of November, it has been connected. On the 7th of November, we also have a big meeting within Mengniu. For our organization structure change, I think this is very effective and the result achieved so far is beyond my expectation. For the 19 different regional managers, they have already been starting their function and in terms of speaking, I think we are completing the management structure. I think it also laid solid foundation for coming days. In the year 2012, we had the first brand with you. In the past, we had a lot of communication about the brand to the investor and also for announcement too. For the year 2013, we focused more on the brand building and the brand categorization. First, we will rationalize brands and also to clarify the audience or the target consumer of our brands. We will focus strictly the consumer and take the consumer-oriented approach to look at our brands. For our brands, we have basic brands, professional brands, leisure brands, and high-end brands. For our marketing, we will focus on the brand category and to operate based on the different brands. For leisure nutrition brand, for example, we will be selecting the team which has this very related experience, especially milk products, that they have experience in this field. People with this experience in the milk product to work together with us. With this structural change, then we hope that Mengniu could be built to be a brand which is very distinctive. Action three is about milk sources. Milk sources is the concern of every company in the industry. Once I joined the company, I am very crazy about this product because for milk product, one of the key factors is the milk sources. For Coca-Cola, they are focused on the concentrate, but for milk product is different because for milk product, every day we need several thousand tons of milk to be handled. For the milk sources, it greatly affects the quality of our product. Last year, Mengniu has been concerned about the milk sources. Mengniu has been involved in large-scale ranch, for example, Xiandai Muchang, a modern ranch. Now we are focusing on establishing our own ranch. Baji Ranch, for example. Why we have to self-build our own ranch? The purpose is not for the purpose of owning a ranch, but with the purpose of nurturing and developing a team of people who know and understand the milk industry, and we will have this system built and to increase efficiency. In terms of management, we also have some new moves and changes. In the past, we just have a simple procurement process. But now we will change to work together with strategic partners. Last year, we had an overall ranch management meeting. In this meeting, we have put forth this strategic partner concept. We hope that we could have a strategic partnership built with the key milk source ranch partners, so that at the same time, we will try to help this ranch to build their quality system and to better procure the related feed and material, and to help them to upgrade their management level. Overall management level will focus more and more towards this overall system building. There are some ranches which are not very big. They have only several hundred cows, so they lack management level. For Mengniu, we will have a specialized team to work with them and to help them to improve their management, to improve their productivity, and to reduce costs. With this, we have been having some good results, and this will help us to improve our overall efficiency and quality. For this upstream, we will try to have this quality system reformed. In the year 2013, including 2014, we will continue to help this. Through our guarantee or even our borrowing, we help them to upgrade. With this, we have touched on a lot of ranch management. Every month, in every area, when we have the monthly meeting, we will ask the peripheral ranch also to take part in our system. We clearly feel that many of the ranch managers are improving their awareness about quality. They understand that quality is the major factor to help them to have a long-term improvement. We are working towards the overall industry, towards the improvement of the upstream of the industry. Then about the quality system. We have been talking about this quality system for quite some time, and we are very sensitive and also concerned about the quality system of China, this milk industry. Ever since I joined Mengniu, I understand that the quality system of Mengniu is very complete, that we are thinking about how to complete a comprehensive end-to-end quality system. We have spent a lot of effort and time to build a comprehensive quality system. This year, we feel more relieved about this system. For our quality system, if you look at the product development part, especially the quality administration center in operation, we have looked at different international companies. We understand that Mengniu, that we can select the best facility to help us. For our milk source, from planting, breeding, and primary processing, and also from product development, procurement, production, and warehouse of the traditional terms, or even on-site management of the sales. We have noticed that over 90% of the complaints that we receive from consumers focus on the end point of our system. The focus is to look at- For us, in the year 2013, apart from our internal quality system, we will focus more on the supplier assessment work. For the suppliers assessment, we have conducted a big meeting with about 500 suppliers, to have a meeting with them to hope that they can join us with the overall improvement of the quality. For Arla Foods, in the year 2012, it is a major measure for us to enhance our cooperation with Arla Foods. Overall cooperation with Arla Foods in the year 2012. Up to now, we have closer and closer cooperation. For Arla Foods, they help us to provide dedicated milk sources, ranch management, and also milk source experience. This year, after Chinese New Year, for our team, we have gone to Arla Foods for a very in-depth exchange. We understand that Arla Foods has 100 years of experience that we understand we can learn a lot of experience from them in terms of management. With this cooperation partner, Arla Foods can give us very good support. This year, they will have specialized personnel to come to our company to look at lean management and DTV design, et cetera. They will help us to upgrade our management. Our team, we discover more and more that this international partner involvement will help us critically for our future growth. So far, I have a business review of 2012. It is a very challenging year, whether internally or externally or to meet the expectations of the external side. 2012 has been very challenging. In 2013, I think we will bring together Mengniu to have a breakthrough to review any insufficiency of the company. During this process, we may have come across questions and to avoid those questions. With this avoidance, we think upcoming year, we would like to break through the cocoon like a butterfly. In 2012, I think our team has already broken through the cocoon, and we are very clear about the problem existed in our internal environment. We are not complaining that it is from the external factor. That is why I thank very much our team that they have been working together with us and whether the issue is about our culture, our value, or whatever, we have already walked through a very unusual time. In 2013, I will see we will have this change to a butterfly situation. In the industry of China, 2012 has been a year under concern. About 2013, I am very confident. No matter whatever the result will be in 2013, our team see the industry as a very good industry. According to McKinsey's forecast, we foresee that our industry will reach the market size of 350 billion and the cover rate will reach 12% in the coming five years. We see this dairy industry is a very good industry. This is an industry that will give you well-being because it gives you healthy information. You will be concerned about your own life. I think this is an industry that will give you well-being much more than other industry, and it is also a high-growth industry. If you look at the average milk consumption of China, it is very low. It is just half of that of Japan. Of course, it is far below the average of international or European, American. Today, we see Jackson joined us. You see how tall he is because he has been drinking milk ever since he is very small. Take that simple example, you can see that as Chinese people, there is still a big room for us to grow. I see the opportunity is still big in the coming year. For the strategy in the coming year, there are four different strategies. I make it very simple. One, two, three, four strategies. They are guideline for us future development. First is about foundation, how to improve our system capabilities in order to upgrade our company capability. 2012 is a year for us to consolidate our old and new team. In 2013, we will have cross-departmental collaboration. This is a new challenge for our company that we need to overcome. Second is about culture integration. A staff incentive and culture integration is the strategy that we need in 2013. It is also our board that sees that the growth of the company depends on the effort of the staff members. At the same time, we also have this option incentive program launched. For me as a CEO, I focus a lot on how to integrate our team to build a very effective team and with a simple culture. At the same time, we will introduce very good system as tools to drive the company. Number three are the steps. For Mengniu, with this big scale of development, if we want to build a better platform, we must upgrade and transform. Not only we are concerned about external business, at the same time, or even more about internal capability upgrade, whether it is for system or for the staff member, especially in terms of product and also channel and also the system. We need overall upgrade and transformation. In the year 2013 will be overall development. We have looked at what are the issues that we need to break through in the year 2012, so that we know that in the coming five year, we have a better guarantee of the growth. On one hand, we focus not only on the figure in the coming five year, but more on how to achieve these targets. The third is about strength. The strength in the past will help us to fully utilize our potential for the coming year. Mengniu is covering the entire China, and we are the leader in the industry. Our team, we have this very effective action-oriented, and result-oriented team. In this industry, we have a very good competitive advantage in the industry. In this industry, on one hand, I understand, from the supply chain, that milk source is very important element. The distribution of our milk sources will affect our growth. We need to ensure a steady supply of our milk source. In the year 2012, you can see that chilled product, we are in the leading part of China. If we could fully utilize our strength, we could have even more, even better and more specialized product. For this chilled product efficiency, I think, in the year 2013, the contribution of the chilled product will be more realized in the year 2013. Then about high-end product. For Deluxe, you are aware of that product and also with the Fruit Milk Drink. These products are also focus products that we work on more in the year 2013. On one hand, Mengniu understands we need to upgrade and transform. On the other hand, we need to maximize our strength. The fourth is breakthrough. Our strategy is very easy to remember. One, two, three, four. The four means four breakthroughs. First, we need to have more star products, two or three star products which have a value of around $30 billion. We are focused on the forging of the star products. Second breakthrough is channel expansion. In the year 2013, we will increase more distributors. We will exploit more our network. We will go more to the third-tier and fourth-tier cities. We need to break through the idea that we rely on just a limited number of distributors, but more, we will master the control on network. Then we are breakthrough more on the milk powder imported. That is why we need to have a consensus with our cooperating partners. We have more consensus with our distributors. For the market, this is a very good market, and at the same time, we have high pressure, too. For milk powder, in the year 2012, we have overall review, and also we have overall rationalization about milk powder. For other foods, they provide very good resources to us, as we are the only one that have introduced 100% imported organic milk product in China. We have advantage over this. For Mengniu own products, we will look at the channels, look at the distribution. For imported products, we will look at the sales of the product through our distribution channels to realize the contribution to the company. These are the four breakthroughs that we will put in our strategy. This one, two, three, four strategy is very clear in the coming year. For our company, there are several areas we need growth. First is the internal capacities growth. We are fast-moving our product for Mengniu. We will have the brand focus, standards established, network explored, and selling power enhanced. For standards establishment, in the past, we had a more macro point of view to management, but now we have more sophisticated point of view in management. We have this more fine-tuning of the sales distribution and also the overall performance indicator for staff members, et cetera. For Mengniu, we need very much this performance indicator to let us know the sales performance. We have this training to let our staff members know how and what to work towards. For our 2.6 million point of sales, which is related to the beverage. For Mengniu, we took up 1.8 million service points. For the points where we have our Mengniu product is about this size. For us, we will continue to explore the network number. Every month, every quarter, we will explore our network and point of sales. For our brand focus, we will divide our brand into star brand, platform brand, product category brand, and opportunity brand. For this brand, I think we should focus on the quality and happiness. All these different brands, they should pull towards our mother brand, which should focus on the linkage and the end use. For these three major areas, the milk source, the sales, and the production, this is the area we will focus on. We look at the suppliers of the milk, then the production level, and the distribution level. For milk powder, just now we see that we will have this very effective internal capacity improvement and to rationalize our products. At the same time, we will explore new channels of emerging. For Chinese consumers, they are more concerned about imported. We are also seeking partners to help to provide very good quality imported products. That's why in the outreaching arm of our company, we are also looking at this area. Then about the basic work, we have been working on the quality management. In the year 2013, for human resource planning, compensation system, and also ERP and CRM, especially information management, we pay a lot of attention to information system too. It could give us guarantee on our business of efficiency. For these four fundamental parts, we will dig deep into it in order to provide guarantee of our business operation. I think internally, you are very clear that, and you understand that what are the areas we need to work. First is about manpower. With the optimization of our management structure, we will have more staff members there to fully utilize their capability. At the same time, we will absorb quality external manpower into our system. Third is about culture integration. High-quality, professional, and international staff members help us build this system. With this system, management system, it is one of the focal points for us to work on. Based on the passion that we have had in the past, we will have a more systematic development. For us, for the management, we will use just a simple form or a simple form to represent us, but not a number of different systems, a complicated system to realize our company. For our company to be successful, I think you remember this simple one-form story. We will adopt a sunshine and transparent system with more communication with our investors. I think with this corporate culture, we should maintain our core value. For 2013, we will have a large scale involvement of the investors to understand Mengniu, to understand the real situation. I think Mengniu, you have been understanding and know about our product. Today, you see a lot of new faces and also old faces, and we thank you for participation. I think for healthy growth of the company, we want to stay central of Mengniu. We need to build ourself to be the product of the best quality, most professional, and most devoted. We will maintain the strength of Mengniu with this high response and high involvement, and we work on the best system to build Mengniu to be a healthy company. With this is very deeply rooted in our team. In 2014, we worked on this a little bit. When we use this slogan, we understand that other people follow us, and with this a little bit by little bit, you understand that for every detail, and with this a little bit and little bit as a female approach of approaching this task, I think it exists in Mengniu, and Mengniu is very confident about this. As an investor, not only you are looking at us from the outside, but at the same time, if you have any favorable suggestion or contributing suggestions, you are welcome to offer us. Because investors, you can see also a very comprehensive and overall view. We welcome so much investors to offer us suggestions. It is not only you just buy our shares, but as a shareholder, you are also concerned about our future. If you have any suggestion, opinion, we welcome your opinion, suggestion. Here, we have investor relation officer, Wen Lan here. You are most welcome to communicate with her. We stress more this year that we need to work together, live together with our cooperation partner. We hope that all our effort is to build a better, a well Mengniu. Thank you very much.