Earnings Call: H1 2014

Aug 28, 2014

Ladies and gentlemen, members of the investment arena, analysts, welcome to the China Mengniu Dairy Company Limited 2014 interim results. Before we begin the presentation, would you please pay attention to the disclaimer on the screen? In order to have a good environment for meeting, would you please turn your mobile phones to silent mode? We have today Ms. Sun Yiping, the Executive Director and CEO, with us. Bai Ying, Executive Director and COO. The CFO, Ms. Zhang Ping. Vice President of Sales, Mr. Liu Shenglin. Vice President of Strategy, Mr. Jasper Funnell-Cording. Assistant Vice President of Public Relations, Ms. Jai Mei. General Manager of Mengniu Danone JV, Mr. Thibault Haverlot. Financial Controller and Company Secretary, Mr. Chris Kwok, and also Mr. Li Dongming, Executive Director and Vice President of Yashili. We will be going through the presentation by Ms. Sun Yiping to go through the interim results review for the first half of 2014, and then we will have a Q&A session. Investors, members of the media, good morning to you. In fact, yesterday at the Yashili meeting, many of you were there, and we have met yesterday. I am very happy to see you again today, and I thank you for your concern for Mengniu and our company. Thank you so much for your long-term support. The venue here is rather cold today because of the air conditioning, but I hope after the presentation, we will all warm up. Now, let us go through some of the financial highlights. In fact, I do not have to go through the details. You would all have that information from our website and relevant information, including the analyst reports, which have already been turned out very timely by all of you. We are putting a lot of emphasis and reviewing very closely all your analysis. Just very briefly, the revenue is an increase of 25% from last year, 51.9% increase of gross profit, some 40% almost for profit attributable to owners of company. As for organic, that is organic growth just for Mengniu, if I can just disclose that for you as well, it is 17.5% increase for revenue. Our gross profit is 36.8% growth. We have a profit attributable to owners of the company, 24.2%. So compared to 2013, I would say we are in keeping with the industry, at least. I do not know what exactly industry average is, but the growth rate is as good as 2013's. If we can go into the revenue breakdown by segment. Our liquid milk is very strong and overall, it is a drop of 4% because we have milk formula and other products coming up. Ice cream was an increase of 1.7% of total revenue. Milk formula, that would include Yashili. It has increased by 5.6% year-on-year. We are very good in terms of market share and also compared with last year, the growth rate is impressive. So milk formula, it is a great increase of 319.7% year-on-year for revenue. In the past, we have been weaker in milk formula, and starting from 2013, we have rebalanced our segments so that we have a more balanced product mix, so that we have more balance and reasonable. Also, we have cut down on over-reliance of liquid milk as we have in the past. Overall speaking, for the entire year, you would be able to see that it has a very good contribution. If we look at liquid milk segment, UHT milk revenue was up 16.4% and percentage of liquid milk revenue was down 1.4%. Milk beverages was up 23.1%, and we have been pushing this product. It is some 23% growth as a result, and percentage of liquid milk revenue was up 0.9%. Yogurt, our profitability has also come up. We are a lot more effective with the production and sale of yogurt, and the revenue increased by 23%. As for market share, we are able to maintain our market share for UHT products and chilled products, and in particular, for chilled products. For Danone, and put together, we are 27% of the entire market. For yogurt product, we are in the leading position. But for Mengniu, for chilled products in our future strategy, it is still an area which we will emphasize and put a lot more emphasis into. It is a growing market, the chilled products. We believe that there will be great opportunities there. Here, we have cash flow and CapEx. As you can see, compared to the same period of last year, there is a slight decrease in terms of net cash inflow from operating activities. You know last year, because there was a shortage of milk last year, and late last year there was a lot of inventorized supply. As a result of that, it has impacted us as well. So this is the net cash inflow, as you can see from the chart, from our operating activities. But for 2014, as mentioned just now, there is a slight decrease. For the first half of 2014, organic, as you can see, there's been a drop. At consolidated, you can see that we have actually put in investments into Jingubaо, which is a milk product production facilities. Also after consolidated, we have a New Zealand production plant in New Zealand. So in terms of plants and equipment, they are mostly from Yashili and Jingubaо. They are both for formula products. Here, I was looking at the analyst reports. Some of you have mentioned as G&A expenses increased 2014 first half compared to first half of 2013. It has increased by 4%, from 18.4% to 22.8%. Indeed, the market is different from last year in terms of competitive landscape. We are able to keep a very good operating environment, and we are able to maintain our supply and also our upstream supply. We have more S&D in order to push the products to the market. Also in our systems building, we are very cognizant of talents, training, and in particular in sales. That is, in promoting sales. As for administration expenses, it had come down from 3.9% in the first half of last year to 3.7% first half of this year. We are looking into how we can shorten the entire back office cycle and to cut down on core or unnecessary administration costs. Now, I have come up with a theme for our company, and that is innovative integration. That is to say, our most important point is to integrate our resources and innovate so that we can be even more sturdy in our returns. Here you're able to see our efficiency index. This inventory turnover includes our raw milk, raw materials. And receivables turnover, payables turnover. You can see that our efficiency had increased and improved from last year. That is very briefly for you. I am sure that our financial reports are already uploaded onto our website, and that they are very clear. If I can take this opportunity to talk to you about the first half business overview. The main point is what we have been doing, and it is not just for report's sake, but to give you an insight as to how we will be operating in the second half of the year and into the future. First of all, implementation of a winning strategy. What is very important to us is safety and also the good development of the entire industry. So this is our foundation of our focus. Strengthen milk sources to secure quality supply, bolster innovation to reinforce our leading position, and also to enhance our penetration for sales. If I can just go back to our IPO, this is a point that I would like to talk to you in particular. There was a media report asking why have we mentioned the IPO, but in fact this is a five-year tool for the future development of Mengniu. It is a tool that we will be using in three dimensions. Now let us look at each of them. First of all, in innovation, that is marketing innovation. This year, apart from product and the spinning off of certain products, in particular, we have been innovating and developing certain milk products such as certain flavors, such as strawberry flavored and other berry flavored milks. Also we have a banana milk as well, and there is a promotional film for that. Next year, there will be a silver screen film with 214 million views, and it is a cartoon character that should boost our marketing innovation even further. Also through digital media, including just scanning, we will be able to increase our marketing efficiency. So we are making new attempts and bold attempts in marketing and innovation. For digital marketing, it is some 20% of our total marketing expenses. For the first half, it is over 20%. For the entire year, it will be over 30% of our marketing expenses. What is important is how we can closely reference our products to our marketing. In particular, we will be enhancing our milk. We will be, through marketing innovations, get closer to our consumers through promoting new products, through Baidu Maps, and through cloud-based apps. We will be able to allow our consumers to see our farms, look at the source of our raw materials, and also internally, we will have a new department, and that is the media and innovation department. Through IT, through total brand management and integration, and through super-computing, that is large data mining, we are able to build up this platform. Well, whether it is successful or not, that remains to be seen, but we are confident and we are putting in the investments and resources into this. We are very cognizant of the existing media, of the traditional media, and how we transition to the new media for innovation in systems, e-commerce, and marketing. Now, the second one is integration. After innovation, we have integration. Mengniu and Danone, after one year, after the signing of the agreement, the approval, and the setting up of the company on July 1. In fact, starting from August of last year, we have already been working together, the teams from Mengniu and Danone. Danone is a world-famous name, and we have been working together, Mengniu and Danone for a year. In terms of product and brand name, we have done a lot of rationalization. In the future, how do we continue to increase the profitability of our cold products or chilled products? As I have mentioned, we are in the leading position, 27% of total market, but we are still not satisfied with that. We want more market share, and also in terms of yogurt and chilled products, we want to increase our profitability. This is where Danone and Mengniu will be able to bring on value. There are three major products, and they are Bio, Champion Yogurt, and Yoyi C. Yoyi C have been, in particular, very successful. We want to reduce our SKUs, especially for those that are not exactly the most attractive to us, and we want to upgrade our taste, and also the packaging of all our products. Through the pricing and also through technology, including our chill technology, which we will be raising overall in terms of standards and levels. On the one hand, we are managing very well our brand names, the Danone and Mengniu products. How do we integrate them? How do we differentiate them in the market so that in the future we will develop these different product and marketing lines and brand names? Secondly, in terms of operation, how do we raise our efficiency and optimize the operation, in particular in the management and production of yogurt? Bio is already in the Ma'anshan plant production. In the Mengniu system, we are already producing these products. How can we, through raising our operating efficiency, how do we enhance the efficiency of our logistics, be able to come to a higher point than even now? I think this is one area that had really contributed to us, and that is in terms of CapEx and prudent OpEx. This has been a very good advantage for us working with Danone. We have been focusing on our A&P on the three major brand names, and we have adopted a very prudent expenditure strategy. We do not have any new plans for new plants, at least for the next five years. I do not have plans for new plants, and we will be focusing on our major brands, our star brands, and our high-margin brands. This is for Mengniu and Danone integration. In 2013, August, after we have started working with Danone for Bio, we have already started with Mengniu production. In 10 cities, then 20 cities, we have already come out with this product. In the future, for chilled products, how do we further focus on this huge market of China? How do we regionalize the markets all over China for chilled products? How can we further optimize and also increase our profitability? That will be the main theme going forward. Next, let us turn our attention to Mengniu and Arla. This is a very good operation model. This is for milk formula, for liquid milk. Apart from Mengniu, as I have mentioned yesterday at the meeting, in the chilled area and formula area, we will be using the Arla technology and also commencing with testing, raw milk testing technology, and also other standardization systems as well. We have in Beijing a test lab that we are looking at Chinese consumers' pattern for consuming yogurt. Through Arla, in terms of controlling and standardization system for the entire supply chain, I would say they are the most successful worldwide. So we are very happy to have this cooperation with them. Here, we will be talking about Yashili. Within Yashili, apart from looking at strategy and future positioning, what is very important is the maternal and baby formula products. Our integration with them is how to take off some of the unnecessary burden from Yashili. That's one of the reasons why we have disposed the nutrition drinks business from Zhengzhou Yashili, so that Yashili can focus on infant nutrition products businesses. We are providing more international assets and resources for Yashili to see how we can be able to, in the future, have more dedicated products for different channels and to increase its production capabilities. We are setting up a joint venture with WhiteWave. Establishing a joint venture with startup activities, which are quite on track. We are receiving the government approvals, and in October, we should be able to expect products coming onto the market. This is in particular in the area of health products, from ice cream, yogurt drinks, and nutritional drinks. Yes. Also investment along the entire industry value chain. We try to use small investments in order to maintain the reliability of our farms. We have 25% of raw milk sourced from farming companies, which we have equity investment, and 28% of our investments are in such farms. In particular, as I have mentioned before, we are most focused on safety. I would believe within the industry, we are the highest in terms of our investment into milk farms. Into the future, we will be further looking into how we can add value in our downstream products, so as to also close up the relationship between the banks and our companies in order to maintain a high-quality raw milk supply. If I can talk to you about the systems, our control systems, and our management systems to enhance our performance, how we are being able to be more objective, how we are more digitalized than before. So this is an area that we have been learning very rapidly with the launch of SAP system, which improves our operational efficiency. We are the only company which has SAP ERP and SAP CRM 2.0. I think we are the only company to have launched these two simultaneously. The pilot run is at three plants last year, aiming to cover 50% of plants by the end of this year. It's been very successful. After the pilot runs in 2015 for SAP CRM, we will be covering all sales regions as well. So this is the reason why I say we have to be external as well as internally focused. Because we need a good internal system in order to sustain a long-term development, rather than to come up with blurbs and spurts here and there with a new product here or a new product there. We are internationalizing in terms of our management team and the board of directors, our shareholders. We are not only looking at what is right in front of our nose, not just for this year, but also for the next year and for the long term, so that we have a robust system to sustain our growth. How can a company grow strongly into the future? It will depend on whether it has a good strategy, and secondly, a good system and structure. Hopefully, there will be less and less reliance on people and more reliance on operational efficiency in terms of the system. Now, the key brands to profits. In the 2012 annual results, I have already mentioned we have Telunsu, and we have other star brands and profit contributor brands, et cetera. These two years, we have continued to segregate our brands. How do we increase our investments into star brands and opportunity brands so that they will bring us more profitability, higher margins in the future? At the same time, we are increasing our focus also on the backbone brands as well to increase the value. From packaging to formula, that is the recipe, we are reviewing the entire procedure to see how much we can provide more value to our consumers. We are looking at the SKUs, each and every SKU profitability that we offer from gross profit to net profit margin, examining every one of these brands. Also in CapEx, we will be investing in brands with growth potential. This year and next year, we will be focusing mainly in Yoyi C and Just Yoghurt, and they probably become CNY 5 billion-plus star brands. These two years, in particular in 2014, we have rebuilt our mother brand, Mengniu brand. We have a brand name increase, we have a new packaging, and through one or two years through this rebuilding of our mother brand, how are we able to turn it into a more consumer-concerned product? You will be able to see in the future how we are able to have this social responsibility image in the future. Also we have come up with every drop of goodness. It is also internally in the system, in every drop of enhancement, every drop of enhancement for the consumer value, adding to consumer value. Every drop for enhancing the mother brand of Mengniu. The management on the stage here are all very clear that our actions are a drop at a time in increasing the, or enhancing the brand image of every, and the quality of every product. For example, the earthquake. It is not about how much we give in terms of charity, but it is also about when we arrive on the scene to help with the victims of the earthquake. So we emphasize Mengniu's social responsibility, and we stay on track with the strategy, then star brands and opportunity brands will experience even more growth. Then another performance is our key brands to profits. In our restructuring, I think this is a most challenging area, and for the media, for marketing, they are important, but what is most important is our distribution, is our retail. That is most important. For any fast-moving consumer product, this is most important. Coca-Cola is an example. How do we sustain the sales? That is important. How do we have control over the back end and also to the consumer, the entire process. Among our ambassadors, they are very young. Our talents are very young, and they've been growing together with Mengniu. They are very energetic, and they have been growing up together with Mengniu as a company, as a brand. In the future, I think the frontline people will have to be empowered. In their organization, in their talents development, we will be continuing with our efforts. A lot of our resources we have devoted to our distributors. The data analysis, we have a data or a dating system. The distributors evaluation, we call it dating, the tracking of them as well. We will also deepen our relationship with them. This is something that we have been doing for a number of years, and that is to build up our retail network and also to build up our sales organization capabilities and our penetration. Also, through our distribution system and restructuring, we will be able to get to the front end of the market. With our core business units, we will be able to build up our own sales team in order to get the sales orders. Also through our innovative sales information management system. We have been backwards compared to Coca-Cola, et cetera. We are very backwards. But last year, through the SAP system and through other systems, we have been building up our sales information management system so that in sales management, we are a lot more accurate. Open and transparent culture. Some of you may say this is very vague, but this is also very important. Within the life cycle of the company for 2013, 2014 in particular, this had been the years for growing or building up our culture across divisions, across systems, and across cultures. Culture is important. Cultural integration is important in building a strong team. We build an innovative and efficient system to improve our strategy execution. Even though within the company, there are certain linguistic or language barriers, but there are no cultural barriers. Everybody is working towards the same goal with perfect integration. Now, we have talked about IPO. Last year or when we mentioned IPO and earlier this year when we talked about IPO, it is about Mengniu and the next five years. It is particularly simple, particularly effective, a strategy and tool. Basically, we will do away with Word documents. Everything will be digitalized. This is a tool for management, and in particular, for the future, how are we able to attain a cross-cultural integration? We have this tool to help us do so. Here you are able to see that every drop of goodness is important. The farms are important. I do not know whether you've been to the Helin Experience Hall. If you haven't, please do. In the past you have not seen a lot of mottos and slogans and some of the pictures with the country's leaders. But this experience hall is actually highly interactive. It's very informational. It is like a park, like an experience center, and it is also interactive, highly digitalized, and IT-based. Also, how do we define our brand name, the Mengniu brand name, and in the future, how do we position ourselves? This is to really highlight the Mengniu positioning and the Mengniu image to clarify it. We have to interpret the little happiness matters through a drop of goodness. We also have a song, "Each and Every Drop" song. It's also on a music video. This will bring on the changes drop by drop, bit by bit of Mengniu, and also how we appear among the consumers. As for the future, yes, we will continue on this path. In the past, we have a slogan for every year. Every year we would change it, but in the future, the brand name of Mengniu, we will want it to continue to exude a warmth, a feeling of warmth, being close to the consumer. It is not something that is very high up. Some people say Mengniu is an old company, a big company. I fear that. I do not like people saying that we are a very strong company or an established company. Rather, I want people to think of Mengniu as a warm company. We want to be more interactive with our consumers. As a fast-moving consumer goods company, what we have to focus on is to touch the hearts of the consumers. Whether we are able to touch them, move them, especially in the new media age, in the digitalized age, this kind of interaction is even more important. Hopefully, each and every investor will continue to support us. We have to, through Mengniu, the entire company's brand name, bring on all our different products. In the past, we have been less forward, that is to say, put out the Mengniu name. But we are now a lot more confident. In past years, we have established the Mengniu name, and we have built up the trust within the consumers' hearts of our products and of our brand name. We will do this a drop at a time. So that's a review of 2014 first half for you. Well, there is challenges. It's not mentioned here. Actually, there are, of course, challenges going forward in the second half of the year as well. As I told Yashili, as I've told my management, there are challenges lying ahead. What is important is how fast we react to outside challenges, whether our system is robust enough, whether we have the means to face these challenges. So in the second half, yes, the market will be challenging, and we have sufficient capabilities to react to that kind of challenge. There is no one year that is exactly the same as another in our business. Every time, every moment, we have to react appropriately. What has not changed is our company internally, our system, how do we execute it to the fullest. So on the one hand, we have to build up as soon as possible, and secondly, we will be building up internally as well, not just the market. Every system, every integration with international resources, the training up of our talents, our management, we will continue to be doing so. Yes, you can see from our management team, it is very mixed. We have the two, our COO, our CFO, and Ms. Zhang Ping, our CFO. Well, though from Coca-Cola, do not think that we have been overtaken or taken up by Coca-Cola. That's certainly not true. I have told you many times, we sincerely hope that through a good management team, we can come up with an international company with Chinese characteristics. Thank you very much for your attention.