Earnings Call: H1 2017

Aug 31, 2017

Dear investors, dear press friends from China and Hong Kong. Welcome to 2017 interim results announcement of Mengniu and Yashili. I believe you have collected the slides in hard copy. Please kindly switch your mobile to silent mode. Let me give an introduction of the management we have today. Lu Minfang, Chief Executive Officer and Executive Director. Ms. Wu Wenting, Vice President and Executive Director. Mr. Zhang Ping, Chief Financial Officer. Mr. Shi Dongwei, Executive President. Mr. Liu Shenli, Vice President. Mr. Gao Fei, Vice President. Mr. Chris Kwok, Financial Controller and Company Secretary. Mr. Zhang Ping, Chief Executive Officer and Executive Director. Ms. Wen Jieping, Chief Financial Officer. We have three parts for the results announcement. First of all, the management will walk us through the business highlights. Then we have a Q&A session following that. Mr. Lu, please. Dear investors, friends from the media, good morning. It's my great pleasure to share some of our highlights in the first half. As for myself, I've been working in Mengniu for nearly one year. This is our first time to walk you through the business highlights with the new management team. To sum up my experience in Mengniu, I think I should say two words. First word is confidence. The confidence is from the fact that our management has worked closely with all the colleagues with a common goal. We have responded to every decision swiftly. The confidence is also from the fact that we have implemented all the strategies that we made at the beginning of this year. Third, the confidence is also from the fact that our operation team is running very well after reorganization. With that, I believe at present, Mengniu is in a benign cycle of development. To prove that, I will talk about the business highlights of the first half. First of all, some financial figures. We maintained 9.7% high speed growth, and that was last year. In the first half of this year, we have achieved 8%. Last year, in the first half, that was earning 6.6%, but in the first half this year, we have achieved 8% of growth. As for GP, we have gone up by 14.4%. You should know this is against the backdrop that the industry has seen GP going down, but we have gone up against the trend. That means our reorganization of team, our improvement of product portfolio has been doing very well. In this year, there is a price raise in raw material and packaging material, but we have optimized our product portfolio and reorganized the team. That's why our GP has gone up a lot. Operating profit has gone up by 18.4%. This is including all the subsidiaries, including Modern Dairy, which is consolidated. EBITDA has gone up 6.2%. Of course, this is because that we have consolidated all the subsidiaries, especially Modern Dairy, which is at loss. The profit attributable to owners of the company has gone up 4.7% to CNY 1.1 billion. Basic EPS has gone up by 4.7% to CNY 0.29. This is kind of over-performing the target that our board set. We have very healthy profit, and there is a rosy picture of GP margin. I'm sure you have been concerned about our core business, especially Modern Dairy. We have acquired the additional shares from Modern Dairy in March and April this year. As for revenue and GP margin, we have talked about it, but there is a 25.2% growth in operating profit. As for profit attributable to owners of the company, it has gone up 29.3%, with net profit margins being 5.4%. That indicates that our key business and the subsidiaries have performed very well in the first half. In the first half, all the business units of Mengniu have seen the growth in their sales. This is for the first time in history, and there is improvement in profit as well. Next, I am going to talk about the business in different units. As for liquid milk, as you can see, our three business units and the other little business units have all increased. None of them is declining. Liquid milk has gone up by 6.8%. Ice cream has turned around. Last year, there was some improvement, but this year it rises significantly. As for milk formula, including Junlebao and Yashili, it has gone up by 7.6%. The decline of Yashili is narrowing because Junlebao has recorded a good grade. As for milk formula, we have recorded 7.6%. As for others, cheese, plant-based milk, we have recorded growth. The base is not that strong, but it indicates that we have achieved some improvement in this business. All of this has brought us CNY 29.5 billion, which presents a growth of 8.1%. I would especially talk about what is good for this year. In all of these business units, we have achieved tremendous growth in market share. As for liquid milk, although some other competitors have outperformed us, as for liquid milk, the structure is changing. This is obvious. We have Telunsu, Just Yogurt, and Zhenguoli. These three products have been doing very well. Second, I think one of the highlights is that we have increased our market share in chilled products, and we have been always the leading player, and it is 28.2%. If we take out yogurt business, our yogurt business is more obviously the market leader, from 31.5% to 32.2%. Sometimes, the results from Nielsen are a bit different from ours. If your memory is right, last year, there was a growth of 9.7%, but it is not reflected in Nielsen's market share indication because the market is tending to be more and more multi-channel. The market trend as well as our business is very healthy, as you can see. In terms of cash flow, in the first half, our cash flow is doing very well. It rises from CNY 2.6 billion last year to CNY 3.4 billion this year. This is thanks to our improvement in operating efficiency, contributing a lot to profit. As for CapEx, as you can see, apart from equity investment, we have controlled the CapEx very well, from CNY 1.48 billion to CNY 1 billion. Another big thing is our equity investment to Modern Dairy. As for free cash flow, it has gone up significantly, doing much better than last year. So we are achieving a high quality growth. As for SG&A, it is rising stably from 23.7% to 24.2%. Last year, it was 25% for the whole year. So I think this year it is more or less the same because the market competition is still heated. That is why we want to keep our position in the market. At the same time, we try to keep our top line at a high position as always. As for G&A expenses, it is down from 4.2% to 3.7%. We have implemented the organization restructuring in all business units. That is why our G&A expenses have achieved very good improvement. We have consolidated business in every unit and improved efficiency. That is why the trend in the expense reduction is very good. As for free cash flow, including our improvement in the operating cash flow, apart from that, we have better operating efficiency, be it for inventory turnover, receivables, and payables. In all of this, we have improved a lot. It is worth noting that our inventory turnover has gone down from 39.3% to 31.5%, a very significant decrease. This is thanks to our effort to reorganize our business units, so our back office and front office can work seamlessly. We have a CMI system with SAP support. Our S&OP operation is doing very well. In terms of operating efficiency, we have seen a very healthy trend. I covered some of the achievements and the highlights that we have. In the next part, I would like to talk about what we did in the first half and what we will be doing in the second half in order to make sure that the healthy growth will be maintained in the future, how our high-speed growth can be maintained in the future. As we said, we have the same guidance as we did in the first half. How can we keep the good momentum? That means we must keep a high sales figure, and we have to continuously improve our operating efficiency. That is why I want to spend a few minutes to talk about what we did in the first half. On this page, as we said in March this year, we have changed our strategy in a bold manner. We have five points here. The first is organization restructuring. The reorganization of the company is our strategic move. Second, improving operational efficiency is very important for the company. This is to strengthen our profitability. Third, we deploy upstream resources with a forward-looking vision and build an old value chain system, so we can see a very good synergy of different industrial chains. Fourth, we promote upgrade in all fronts, in all categories, and drive the development of new products. In the first half, our new products, especially in chilled products, Zhenguoli, and ice cream, we have seen very good results. Last but not least, our strategy is to build a channel advantage through various approaches and continue our route to marketing initiative and strengthen the competitiveness in sales channels. I would like to give a detailed view of every point. First of all, as for the organizational restructuring, this is in line with our strategy and business. Traditionally, our edges are in UHT chilled segments and ice cream. As of today, you can see there is a rise in our market share in chilled segments and ice cream. That indicates our business units have been doing very well in making general decisions, especially in marketing. These are thanks to the decisions of our business units. This has improved our speed of decision-making. As for milk formula, we have been actively adjusting our business, including the product structure. In Yashili, we have seven series and 21 products. This is the brand that we have most products. That will strengthen our deployment in product. I believe with that, the results of Yashili will be even better in the second half. We also actively build up new segment, and we develop business with high growth potential. We have to highlight a few points. First of all, pasteurized milk. We set up the BUs for pasteurized milk in May this year, starting our deployment in this round. After our move to take additional shares from Modern Dairy, this is one of the strategic moves that we did. That is why we acquired additional shares from Modern Dairy, because we intended to get their best part that was pasteurized milk. We have started the job here, and we have an individual team for the operation. Second, plant-based protein drink. The sales has been rising very well, but there is room for improvement and for profit. We have more strategy for this. Cheese business. In Mengniu, our own cheese business has developed very well. Recently, we have reached an agreement with Arla to set up a new cheese factory in China. This factory will be put into operation next year. Prior, before the production launches, we will be using Arla's China layout to help us with our JV layout in China. Finally, our international business. Actually, regarding this part from Hong Kong, Macau, Southeast Asia, et cetera, at the moment, for this part, it has been growing at 30% annually, consecutively. It is growing very well. If you look at a lot of our products outside in the lobby, quite a few of them are sold in Hong Kong as well as in Singapore. For example, our brand Just Yogurt, it is selling very well in Singapore. It is very popular in Southeast Asia. We welcome you all to taste our products that have been showed outside. Besides those, we also have our index high-end milk layout, and that is almost completed. Going forward, along the One Belt One Road countries, our layout will be completed soon. Our growth will be sustainable. For the second half of this year, in terms of the first half of the year, we have worked on our organizational. Second, we need to have a very good system to empower our units so that all their strategies could be implemented sooner. You can see this is why we have been able to do very well out of the costs area, especially for the A&P and cost, et cetera. For our second half, our priority would be R&D and branding. This is for us to lay out our strategic plan. Last week, I went to the U.S. in our R&D for UC Davis. They place the center for R&D around the world. I was very surprised to see that for that university, every year, there are 3,300 Chinese students enrolling in that university, and in my lab, in our R&D unit, including UC Davis, around 60%-70% high-end research talents come from China, PhD and postdoc holders. In addition, for our technology R&D, we also have enjoyed breakthroughs. Therefore, R&D as well as branding building will be our second half year's priority. In addition, we also talk about, in order to realize this growth, we need to work hard on our incentives mechanism. This is also one area that you will see a lot of improvement in this area. We will make sure that it is the performance-driven culture in the company. Finally, in order to realize this, we need to strengthen our performance approval. Actually, we've done a lot of work, perhaps from the outside, you didn't really understand. We make sure that it is performance-led. If you're able, you will be able to be promoted, otherwise, you can't move forward in the company. Second, on this part, I'm not going to spend too much time on this. Actually, last Q3, I talked about this. We have seen great results coming from these three areas of work. We can see that for the packaging material, it has gone up by 40%, but for Mengniu, in this backdrop, our growth margin has actually been able to grow. Therefore, in terms of the cost control, we have done very well. For A&P efficiency, for the three products, Telunsu, Big Fruit, and Just Yogurt, these three types, 90% of our A&P are invested in these three products. We will continue to improve our merchandising efficiency. Finally, on our supply chain. Our supply chain, we have eliminated the unnecessary OEMs. In addition, for the raw milk, together with the factories that we have for each business unit, we have been able to create great synergy. All of the system has been realized by digital method. All the Budget or the performance appraisal, et cetera, is all done digitally. Based on this, there will not be high price milk powder. Second, our synergy with different BUs, it is going very well, and I'm very satisfied and very proud of this, that we were able to connect it seamlessly. This, again, reflects the improvement of our gross margin. Going forward, we need to continue to work on our COV. We hope that there will be further enhancement on the achievements that we have already made. We have six indicators here. We hope that we would be able to implement these, and I believe that the COV efficiencies that we have seen this first half of this year will be further reflected in the second half. Finally, I'm going to talk to you about the integrated resources. First one is the China Modern Dairy. Second is the successful operation of milk sourcing divisions. We hope that it is not only just a division to source milk, but also for the milk powder, raw milk, procurement, and centralized management is all synergized in one department. As long as we can make it work in the whole group, it will be rolled out. However, for the CMD, I'm going to spend some time on talking to you about this. The synergy work with CMD, we have already seen achievements so far in terms of the three areas. Overall company, cost control, and brand business. You know that CMD is also working hard on reducing its financing cost in terms of quality control. You know that we do not need to stress more on that. In terms of brand business, we have completely taken over CMD's production to sales of their branded business from their UHT to their chilled business. This has been finalized since June. In addition, we have also launched new products for CMD, which is Xiaoxianyu. This product is growing very well. I hope that if you have the opportunity, you could also taste it. The third area is on the farming business, including raw milk supply, raw material procurement, and upstream business. I have also spoken to the investors. For the first half of this year, we did not produce any converted milk. However, Mengniu did not have any suffering from it either. In addition, Mengniu had used these resources very well. If looking back at a lot of the companies, with the figure that I got is every company had used converted milk. However, Mengniu was the only one which did not use this. Not only that, we have not made a loss, perhaps we have even made a gain for Fuyuan Farming in terms of our raw material procurement. Some of those platforms are also being rolled out actively. I believe that this will bring benefits to CMD as well as Mengniu. One area I'd like to focus on, which is the premium work that we are doing. Three area. One is the Telunsu, then Just Yogurt, and Big Fruit. For chilled business, our famous brand is the Aeronautic. For ice cream, it is the Tilan Shengxue. For mother-baby product, we are also working very hard to promote it. Finally, in terms of actively promoting innovative products, for example, Telunsu. I think that you must try this, the super premium chilled yogurt. This Telunsu is the one that is the most tasteful in China. Second, with the LC-37. You remember UEC last year, it was double-digit decrease, and this year it is positive growth, together with our Little Blue Bottle. These two areas we have done very well this year. However, for us to further improve, this is not enough. In the second half of this year, we will continue to push forward new products. For example, the Xiaoxianyu Pure Milk, Telunsu's Milk Deluxe, M Plus. This product is almost ready. Finally, new products under Just Yogurt. I'm not going to reveal this yet. This will be launched in the second half of this year, a UHT yogurt. Actually, we have a few different series, and they will be launched at the same time. In terms of chilled, our BB-12 Champion, this is a great product differentiation. Perhaps you have heard about this in the news. This is a self-owned bacteria by Mengniu, with the spaceships coming back to Earth, and this bacteria will be utilized in our products. Finally, our European-style charcoal yogurt will also be pushed forward to the market. We also have other types of new products. I'm not going to further elaborate. It will bring you a lot of surprise. These products, together with our current star brands, they match very well, and you could taste our new products, together with our star brands. Actually, the new products, the taste has improved greatly, including the Milk Deluxe, the Milk Plus yogurt, as well as the LC-37, the Little Blue Bottle, and the Milk Deluxe M Plus. If you are into going to the gym frequently, please try this. This is a great high-protein milk. Finally, we have always been talking about how to manage our channels and refine our channels. Despite what we talked about last year, we also have enhanced our sales channels this year. I can tell you our sales company's quality, as well as our CDU's quality, have improved greatly because they have the ability to execute to make a profit. This is very good for the business. In addition, with our distributors, we have also established a very good distributor system with them so that we can move forward hand in hand. By the way, we also talked about key accounts, key cities as well as township breakthroughs in Beijing and Shanghai. We have changed our operating system. Beijing, great growth. Shanghai, since June, the growth is also showing momentum. I believe this strategy is very important. In addition, for areas where Mengniu has been leading, the market will continue to push forward. Finally, on the townships and villages, this will be a very important area for us to grow in the future in terms of both chilled and UHT to push forward our growth. This year, we will continue to add other locations. Next month, we will have a comprehensive cooperation with Alibaba to talk about a new online channel. Just now, we talked about the organizational structure to the market penetration. These five areas, one, two, three, five, as shown on the PowerPoint. We have been able to make progress in all these areas. I think just now, it's a very brief introduction, but for us, it is a good introduction for our strategy as well as its implementation for this year. Before I finish, I would like to share with you the changes of Mengniu. It's because we now have a new core team, new structural organization, a better corporate culture. Therefore, I think this is a solid foundation together with our better, clearer strategies for our business. Same, in our board meeting yesterday, we have received support from our board as well as our main shareholders, whether it is UHT or chilled business or our business with Arla. For the business going forward this year, in terms of R&D or technology support, et cetera, they have been giving us maximum support for a lot of projects. For example, in Danone, some of those projects are leading projects. Because we have a great team, everyone is working towards one goal. Because we have a corporate culture that is positive, it has put Mengniu back on the map, on the right trajectory. I believe going forward, I'm of full confidence of Mengniu's future. Our whole management team are very confident and also very confident of our board, and I would also like to thank the media as well as our investors for your continuous support.