Earnings Call: H1 2018

Aug 30, 2018

Dear guests, welcome to 2018 interim results announcement for China Mengniu Dairy Company Limited and Yashili International Holdings Limited. Before we start today's result announcement, please allow me to introduce the management. We have Lu Minfang, Chief Executive Officer and Executive Director. Mr. Zhang Ping, Chief Financial Officer. Mr. Liu Shenli, Vice President. Mr. Gao Fei, Vice President. Mr. Zhang Yong, Vice President of Strategic Management. Mr. Chris Kwok, Financial Controller and Company Secretary. We also have Chaoping Zhang, Chief Executive Officer and Executive Director of Yashili, and Ms. Wen Jiapin, Chief Financial Officer, Yashili. Today, we will have Mr. Lu to introduce us first about the performance of Mengniu for the first half of this year, followed by Mr. Zhang from Yashili, and followed by Q&A. We will invite Mr. Lu onto the stage first. Good morning, dear investors and friends from the media. Today, I can see we have a lot of people in this room. Perhaps, you are all very focused and pay a lot of attention to our performance. In the past two years for Mengniu, actually, we have returned to a normal development trajectory. For first half of this year, I think one sentence can summarize very well. This is high quality, sustainable growth. I would now like to walk you through in detail about the performance for the first half of this year. Revenue for six months is a high speed one, 17%. Net profit attributable to owners of the company is CNY 1.56 billion, an increase of 38.5% year-on-year. The growth of our revenue is a very healthy one. For our UHT chilled and ice cream products, both enjoy double digits growth. For the first half of this year, the highlights also include milk formula. The increase of our milk formula has seen 60%, so this is thanks to the excellent performance of Yashili and Junlebao. The 17% growth of revenue, out of which our volume growth is 9%, and the other growth comes from structural growth. In terms of the growth in our different categories, which has also helped with the increase of our gross margin, gross profit, and you can see the gross margin has increased by 39.2%, which is 3.6% higher compared to last year. In the meantime, our net profit is also growing. We have profit of CNY 1.9 billion, even if the speed is not as high as our revenue for first half of this year. You can see we have invested quite a lot in marketing and promotion because for the first half of this year, this is because of our support for the World Cup, and you have seen the promotion video for the World Cup before you entered the room. We believe that 5.6% operating profit margin, this is a normal figure for us. Same figure for the whole year of last year was 5.6%. Overall speaking, we have seen very good improvement in terms of our net profit margin, basic EPS profit attributable to the owners of the company. Now, I am going to move into the specific segments, and you can see our liquid milk increase of 14%, ice cream up by 12.8%, milk formula up by 65%. The other business, we have also seen good growth, up by 10.7%. Overall, they have contributed to the 17% growth of the group. The growth of the liquid milk this year, we have the Milk Deluxe, which is the high-end milk, which enjoyed 19% growth. Just Pure has grown by 31%. Again, both of them have pushed forward for the liquid milk growth. For ice cream, for three years consecutively, we have enjoyed double-digit growth. In this year, reaching 12.8% of the growth, which is very high in the ice cream industry. The highlight of this first half of this year, again, milk formula, 65%. This is for the first time in the past two to three years that we have seen large amount of positive increase of milk formula. For other new business in the group, we have also seen good growth. For example, for cheese, fresh milk, plant-based nutritional food and overseas business, all have seen double-digit growth. All of these continue to bring growth momentum for the company going forward. We are firmly believing that this type of growth is sustainable going forward. Looking at the market share, look at the UHT, chilled yogurt, milk formula, and our e-commerce. We are gaining market share in all of these aspects. UHT growth by 0.2%, chilled yogurt 0.2%, milk formula 0.2%. This is quite a coincidence. E-commerce, we are also seeing growth. In addition, we continue to maintain number one in the market, same as our chilled yogurt. So these two aspects, we maintain number one in the market. You may also look at this for our market share growth. It does not quite match with our overall growth, and I would like to explain this. This market share comes from Nielsen. Nielsen's market increase rate does not represent the total growth percentage of the Chinese dairy market, and Nielsen does not represent all the dairy market. Therefore, actually from 2016, 9.7% growth the whole year. 2017, 11.9%. First half of this year, growth of 17%. Our growth has been continuous. Our market share's expansion in terms of its trend, actually is in line with our growth momentum. For the other financial indicators, for example, operating cash flow, we have reached CNY 3.4 billion. CapEx, compared to last year for the same period, has increased. This is because we have put our plans further in advance compared to last year. Therefore, we have made plans for our investment and utilizations of capacity, which means that our new products have been well supported. For the capital market this year, you may feel that there is a big change, which is our sales and distribution rate has gone up quite quickly, gone up from 24.2% to 28.9%. One is because of the promotional cost for the World Cup and the advertisement that we had invested in for sponsoring the event and our advertisement with CCTV was alone at CNY 800 million. However, in terms of the sales discount, there hasn't been a major increase. This is a special feature of first six months of this year. Overall speaking, we have brought already the advertisement and promotional cost, as well as same for the World Cup. In terms of our sales discount, there's no expansion, especially for quarter two. You know that in Q1, we had done very well. For Q2, our focus was on RTM, new product, and work on the online aspect as well as World Cup promotion. In this backdrop, this has actually not been changed by any big discount. For Q2, you can see that Q2's growth was not as high as other competitors. This is because we want to stick to our own rhythm and to invest in our products. This is our strategy, which remains unchanged. As a result of what we can see now, the management team are very satisfied. In beginning of this year, we hoped that for the increased portion of the growth margin, gross profit margin could be reinvested into the promotion and advertisement to support the brand. For this selling and distributing expense, this is a reflection of our strategy for 2018 first 6 months. We are very confident about this. Later on, I will tell you more about the effect it had. Second, for the G&A expense, slightly increased from 3.7% to 3.9%, and the first half of this month is lower than the overall of last year, which was at 4.2%. We still believe that this is at the normal level. It will not increase by a large percentage. For other aspects, for example, inventory turnover, receivable turnover, and payable turnover, these are all very good figures. You can see that our inventory has not increased, including our Q2. We did not follow up with the competitors and by end of June, our inventory is still very healthy. Receivables and payables are the same, very healthy level. These are some illustrations and introductions of our financial aspects. Moving on, I am going to talk to you about what we have done in 2018. In our work, I will also further explain what we have done to further explain the financial indicators. We know that today's consumption environment has changed quite a lot. Consumption upgrading is still a main driver. The consumption for dairy product, if you look at it in the market, there is still a very strong demand. For the second half of this year, for the whole dairy market, we are very confident. Second aspect, our wages have gone up, and you can see that the administrative expense has gone up slightly, but it is within our control. What we have done quite well is the control of cost for raw material. The gross profit margin increase of 39.2% partly comes from the structural optimization of our products. For example, we have increased the portion of our high-end product. Another very important aspect is because of our control on raw material cost. For example, for packaging cost, we have controlled very well. In addition, it is our overall efficiency has gone up. To respond to the market, these are important measures that we have taken. Next, I am going to talk to you about the consumption scenario changes. From another aspect, you would be able to understand the Chinese market changes. The traditional channels or what Nielsen covers. Actually, we have seen major changes. E-commerce, O2O, and unmanned shops, these are becoming more and more prevalent. In addition, competition is still fierce in this market. We have not really seen any industry that has a reduction in competition. What I want to talk about, that whatever strategy we had in the beginning of this year, we will adhere to it. For 2018, we have six important measures. Why have I given them this order? The first one is R&D capabilities. This is what we talked about in the end of last year. These are six very important measures. One is R&D, second is World Cup, thirdly is our management capabilities for omnichannels. Number four is our efficiency improvement for supply chain. Number five, real breakthroughs and innovations. Number six, our building for the organizational culture. For R&D for Mengniu today, it is becoming more complete. Besides product R&D, we also focus more on the overall basic technology for our new technology development platform, precise nutrition planning, informationalized product life cycle data, package platform, key technology buildup, for example, probiotics function development. In addition, we also have sustainable packaging plan as well as R&D abilities in this regard. All of these we consider very basic R&D capabilities. Besides this, for innovative products, we are also very focused. In 2018, we have seen very good results. For UHT milk, there are two products I would like to talk about. First, Milk Deluxe Organic Milk. This is based on the latest technology with a lot of calcium. I think for high-end milk, it is one very good example. If you try it, you will be able to have a different taste after tasting our Milk Deluxe Organic Milk. The other thing is, if you are active on WeChat, then you will be able to receive information on our weight management product. It is known as ManRan (Burnlooking). It is in the form of slow-burning approach. There is not the use of traditional marketing and publicity methods or tools. This is a good product category. We have reached 50 million monthly figure platform. This product has only been launched for five to six months. Concerning our various products, for example, fruit yogurt, our fruit milk drink, Just Yoghurt and so on. These all have achieved good results. Chilled yogurt. We have the first yogurt That can actually serve as a meal. It can replace a normal meal. Then there is the Lanmeı charcoal yogurt and so on. In the first half of this year, there are many innovative products in our chilled product category. Then there is overall upgrading of our products. It is using the frozen method. Then there is the chilled fresh milk, which gives very good taste and texture. Those who have tried it all like it. This year, basically, we have been selling very well. As long as there is comparison, you know what is good. Just do a comparison of our fresh milk and other fresh milk. All our products have got good word of mouth. Our ice cream. We have Wu Yi as our ambassador, and it is selling well. This year, there are a few products which had exceeded CNY 100 million in sales. For cheese, children's cheese, we have made good results. For the new line, production will only start in November. No matter whether we are talking about new product lines or traditional existing segments, our new products are doing very well, giving strong performance. I will not talk too much about the World Cup. This year during the World Cup period, when you watched the World Cup matches, it would be so difficult that you did not listen to the name Mengniu. Everybody remembers our message. No matter where you are, you will remember our advertising slogan. Our brand impact. From January to June, our brand power was enhanced 11.6%. If you look at the brand effect, brand power, and brand image, there has been a big enhancement. In the past four to five years, this is the first time that we had got such a strong and loud voice that everybody can hear. During our World Cup promotion period, our execution capability was very good. Let me give a simple example. For our red packet event, even the government officials were shocked because during the World Cup period, 2 million consumers scanned our red packet event code every day. All together, the number of persons reached 237 million. In such a short period, consumers had been engaged in so much interaction with us. Concerning this red packet activity or event, it is very precise. It reached consumers very easily. It was not in the form of traditional promotion. In terms of effectiveness and efficiency, the traditional method was not as precise and effective. Concerning our interaction with consumers, I think it has been very strong, especially during the World Cup period. It has become our very strong weapon. In terms of sales execution, starting from January 10, we kicked off our campaign all the way to World Cup. Finally, in terms of the promotion and sales outlets, market coverage enhancement, all these were just amazing. Concerning our channel model, perhaps all along you have been saying that there is room for improvement. This year, we capitalized on the World Cup event to strengthen our sales and marketing. We dig deeper into channels. Our self-operated capability has been enhanced. For Shanghai and Beijing, our market share rose fast. This year, market share in core cities was much enhanced for Mengniu. At the same time, we attached importance to developing villages and towns, and we laid outlets. That is why market share in villages and towns had been much enhanced. Results have been good. The school outlets. During the World Cup event, execution was particularly good in school campuses. In February, we said to the team that we needed to launch new products and lay a good foundation and do good promotion during World Cup. These three acts had strengthened our sales capability. One important highlight I would like to emphasize is that right now on e-commerce, our overall layout is also leading. For traditional UHT milk, it is not delivered online. For chilled products, we are working with Ali and JD and other major e-commerce operators. We are leading on these channels. In towns and villages, why are we developing the markets there faster? Because in China, there are two biggest channels which are using the online channel for B2B. One is under Tencent, one is under Ali, known as 1688.com. They are our working partners. In fact, we are their only working partner, and in a single month, we exceeded CNY 100 million already. Besides, for the new retail channel, we had got a strategic cooperation with various supermarkets. Concerning unmanned shops, unmanned retail operations, in the second half, we will do even more. Just now I talked about an enhancement of our selling capability. Now let me talk about supply chain. In the past two years, we have been working hard to improve our supply chain efficiency. In this regard, I think, again, we are leading the market, no matter whether we are talking about upstream resources, layout enhancement, source of milk, and also our production operation, efficiency improvement and cost control, prediction of sales, smart ordering and so on. Ali Cloud has sent a special team to do the work for us. From smart ranches, smart production facilities, smart supply chain, there is a lot of room for efficiency improvement. Last time, I led a team to visit Ali and we did a study and deliberation from production base, all the way to consumers. Actually, there can be self cycles and there is a lot of wastage in the process. If we can optimize the supply chain, we believe that this number can be reduced. For each cycle removed, then efficiency can go up by 10%. There is a lot of upside here. For new businesses, I just talked about fresh milk. I think that it is the best-tasting fresh milk in China. Please try it. Right now we are covering Central China, and also Southern China, and Eastern China. Then cheese. In Beijing we have a cheese R&D center, and they attach a lot of importance to Jimusu, and that is the first step of upgrading and also the catering channel. The other retail cheese is actually cheese for children. Growth in China for this segment is big. We hope to become number one in cheese for children. Then plant-based products, we have achieved double-digit growth. We do not go for quantity, but quality. Now we have the core technology already. If we can enhance our soy milk product to a higher-end level, then that would be a very good strength, good positioning. For overseas business in 10 countries of ASEAN, we have already got operations and in the major countries, we are in leading position, especially high-end milk and also our Just Yoghurt. Then our facilities. Our operation facilities have started already. In March this year, we got the land, but I can tell you that in October this year, we can start selling. In only seven months' time in Indonesia, we started from scratch. We got the land, and then we built the factories, and then we launched products. Actually, in October, people will be able to get our Yoyi C yogurt. People may be concerned about our other business, our two other businesses. In the past, they were not part of us, so to speak. But starting this year, they will not drag upon our results. The first one is Yashili. Later on, Mr. Zhang will go through Yashili's performance. In the first half of the year, Yashili achieved revenue growth of 55.6%, which is actually a breakthrough, and they have achieved a turnaround as well. We had fulfilled our promise to the capital market. This year we achieved big growth and we achieved a turnaround. Modern Dairy. At the same time, we have fulfilled our promise. The operating profit is such that we are able to more or less break even, and net cash flow has now become positive. In other words, they have their own ability to generate cash, so their operation has moved on to a positive track. Modern Dairy had given us very good support, especially for our chilled milk product. We have good milk source from Modern Dairy and, in fact, during the results announcement, I said that right now in China, if you look at all the dairy product companies and milk farming companies in China with good scale, Modern Dairy has become one with the best quality. I think that in the future, these two businesses will deliver more positive impact instead of negative impact to us. Finally I would like to conclude by our corporate culture. As you know, this year or in the past few years, and also in the past 18, 19 years, we achieved success. That is because we attach importance to our people and our corporate culture. Now for our structure, it is in line with market changes. We are consumer-oriented. We have compressed management and our structure is now more like an organization to fight a battle. Besides, actually right now we have started to nurture and train our next level core management. That is the heads of various business departments. For our market development and R&D, digitization, all these are being done. For our remuneration package, it has been adjusted. We actually offer more rewards to those people who exceed targets. This year, I am sure all employees feel happy. In the first half of this year when it comes to conditions of service and so on, there has been big improvement. Finally, let me go back to our basics, and that is our philosophy, our values, and also our spirit. I will not repeat all those points. Finally, I would like to draw a conclusion. In the first half of 2018, we exceeded the goal set by the board, and we also exceeded our own target. Our rhythm has not been affected by short-term discounts and promotions of competitors. We would like to build a 100-year enterprise. We would like to build a really good brand. Innovations and channel building will become our core competitiveness. I look forward to satisfactory full-year results. Thank you very much.