Earnings Call: H1 2013

Aug 29, 2013

Good morning. Welcome to take part at this interim result announcement of China Mengniu Dairy Company Limited. Before we start, we would like to make this announcement on the slide. In order to allow everybody to have a silent atmosphere at the meeting, would you please switch your mobile phone to the silent mode or the vibrating tone? Thank you. First of all, we would like to introduce our management team. We have Madam Sun Yiping, ED and CEO. ED and VP, Mr. Bai Ying. ED and CFO, Mr. Wu Jingshui. VP in sales, Mr. Liu Shengyi. VP in marketing, Mr. Jesper Snetsting. Senior financial controller and IR officer, Madam Wu Wennan. Financial controller and company secretary, Mr. Chris Kwok. Our meeting today will be divided into results announcement and Q&A session. First of all, we would like to invite Madam Sun Yiping to give us a presentation about the performance of 2013. Distinguished guests, distinguished investors, good morning. I felt that time flies really fast. This is already the third time I meet everybody. I am very pleased that there are always familiar faces sat in the front row to support us. I would like to say on behalf of the management team to thank all of you. For each meeting of the results announcement that we had, we have more and more pressure because we are aware of the concern of the investors and also expectation endowed to us. We will put on more effort each time. As we know that this morning, our time is very limited, we will make it simple and short, and to allow more time for Q&A. First of all, I would like to give you a review of our results. As many of the information of the data we already obtained in our results announced. This year, our revenue have a change of 13.3% while gross profit increased by 18.9%. Overall net profit margin, we also have an increment. Overall speaking, in the first half of this year, Mengniu, we have maintained the strategy we kept at the end of last year, and at the same time, we have quickly adjust our structure. In the new management structure and in the integration of the management team, I think the management team, they tried very hard in the new position that have quickly upgrade the operation ability of the management team. If you see the overall speaking for the liquid milk, we have achieved this CNY 18.2 billion, which took up 88.3% of total revenue, and year-on-year, 14.4% increment. The main reason was we adjust our sales marketing strategy and also adjust the SKU. Also for the ice cream, because of adjusting the SKUs, that is why there is a slight decrement. In liquid milk, we are still very strong, especially the high-end product. Year-on-year, we have a 13.5% increment. If you look at the beverages, we also have 18.5% increment. For yogurt, we have 11% increment. If you look at liquid milk, the contribution of liquid milk is very good in the first half of the year. If you look at the market segmentation, we maintain our market share with this competitive advantage of us. When you look at market share in the first half of the year, there is a slight decrease. In the year 2012, there was a slight decrease, but in the first half of the year 2013, we still have a slight increment. Because of the adjustment that we have made, it allows us in the first half of the year, we maintain this stable condition. Overall speaking, in liquid milk and yogurt milk, we are still the leader of the market. In terms of financial situation, financial operating figures, there is a big room for us to do improvement. If you look at the first half of the year, our cash flow, when I report, I am talking about our internal growth. As you know that Mengniu have made a lot of acquisition recently. In the first half of the year, the figures are based on our own internal improvement only. There is still a lot of room for us to improve the net cash. For the capital expenditure, when you look at this compared with last year, there is slight decrement, because this year we are concerned about the capital expenditure, especially how to improve the utility rate of existing plants and also to reduce any over-investment. There is a slight decrement in this. The relatively large expenditures on acquisition, that incurs a relatively large acquisition expenditure. But it is in line with our strategy and also allow long-term revenue. If you look at our operating efficiency, inventory turnover, look at the number of days it has reduced. The receivables turnover also reduced the number of days. For payables, turnover were also reduced because at the beginning of the year, because of better control of the cost, we have improved on the payables as well. Overall speaking, operating efficiency, we have improvement over the previous year-on-year. The above is mainly the operating result, as you already see our detailed report on our public results. I understand that every analyst will give me more detailed analysis. In the coming few days, if you have anything you would want to understand more, there are plenty opportunity for you to understand that more. I would like to talk more about the operating guidelines, and I would like to report on the first half of the year, what we have carried out. Once I have been taking up this post, I have been putting effort in to maintain the activities that we are carrying out. There are also areas that we focused on. For the first half of the year, we maintained to be able to enhance our quality control. Compared with last year, we have a much better increasement already. This year, we focus more on the raw milk and also the middle procedure, which is the selling of the milk. We focus more on this area on the quality control. Because of the joining of international partners and with cooperation of other companies, we will maintain this end. We will perfect the strategies that we have, and we will try to make use of technology to keep on our quality control. We have a slogan that the technology will help us to maintain quality. We will focus more on how to make use of technology and to improve on quality control. Second is about boost quality of milk sources. We look at the ranchers and scaled farms, which is the majority of our current milk sources. For Mengniu, no matter what size we turn into, this is also the main area that we will focus on, which is to boost the quality of milk sources. Another area is about the product flavors. As I have reported last time, we have made a very good product consolidation, and we focus more on the flavors to achieve efficiency in the year 2013. This move has achieved very good result. Our focus products, we have achieved better than average growth rate. That gives us a signal that as long as we focus on the key items, key strategies, we could make achievements. We have also optimized our sales channels, especially for future products of Mengniu in the ice cream area. We will need to look at the ice cream products, and we have put it as a special area that we will focus on improving the ice cream products. This move will continue. In terms of the product innovation, as I am in Hong Kong today, I have looked at the display of the product. I think this time, the product display is the most beautiful that I have seen for the several times I have been in Hong Kong. Apart from Milk Deluxe, we have Yoyi C also been listed. Yoyi C is also the focus product that we want to work more on. Yoyi C has very fast growth this year, and this has a potential to be a star product of our company. From internally speaking, we will thoroughly look at our product and we will have the strict product optimization. We will make faster the product innovation. I thank my colleagues to support me on this product innovation system in order to ensure to enhance the products consolidation in future. This is also one of the area which is the most difficult in our company, is to optimize the sales channels. Because of the sales management structure, we have made the changes last year. For the new team, they are working on the new post. In the past half a year, on one hand, we maintain a stable growth of our sales. On the other hand, we need to work more and hard on the sales channels. We have done a lot of work on the sales channel. This is mainly about operating guidelines on quality control, milk sources, product innovation strategies, and sales channels. We work more on this, we gain more confidence. We hope that in the coming days, in the quality control or in other areas, we will be better and better in the industry. Another area is about innovation of focused brands. For product innovation, we have it on the non-bacteria items, but focused on the key brands. We have done a very good packaging on the key brands, and we have received very good result from the customers. For example, in our fruit drinks, and also in the coming days, we have two star products. One is the Just Yoghurt product. At present, we have good market response. Another star product in future will be the latte. These two products are the products that we see opportunities in these two products, because on one hand, no matter it is about the texture, the flavor, and also the market positioning, we see a very good potential in these two products. For this area, in the main city, we have CBU. For regional, we have RBU. In the future, whether it is about sales management in the micro sense or slowly in the more detailed scale of the marketing management, we understand that in future, the response rate will be very fast. In the end user sales channel, we also have a standard set, which is how to expand our distribution or sales network. For this work, we need a very good sales marketing company. In the first half of the year, Mengniu has started work on this area. For the changes, we will maintain the changes in the coming days. About strategies alliances. Whether it is with Yashili or to Danone or with Modern Dairy, we have done quite a lot of moves in the first half of the year. We see how could the management team accommodate with the alliance strategies. So we see it totally are in line with the strategies that are reported in the year 2012, and our moves have not deviated from our strategy set. So we are still seeking on any future and any more synergies that we could found. For the cooperation with Danone, we have gradually and systematically cooperated with them, and very fast, we will see the switch on of the cooperation with them. There are several items we have conducted in the first half of the year. On one hand is strategy moves. On the other hand, it is also opportunity there. So if you look in the cooperation, we position ourselves in the supply chain. On the other hand, we take a brave step and bold step in the internationalization to improve our technology level and also management system. Our team, we have felt the advantage that we have enjoyed by joining alliances with international company. We have the technology exchange with this international corporation. With our open mind corporate culture of Mengniu, whether it is about international cooperation with Arla Foods or with Danone, I think that this kind of motivation to our team is more than our expectation. You can feel that the corporate culture that we have laid down long time ago in Mengniu has allowed us to have this move in the present time. Last year, I remember in March last year, many investors asked me what are the things I planned. So at that time, I remember I said, whenever there are opportunity, we will quickly try to grasp it. So for us, according to Yashili, Mengniu still have a lot of integration consolidation to be done. We are still looking at what are the resources in Mengniu that we could use it on Yashili. So in order to make use of the technology level and also internal management level. For this slide, I think I will skip it. For future, I would like to talk more about Danone. Look at the stock prices, and I think the response to Danone is the quickest and also with the largest intensity. I am very pleased that we could cooperate with Danone. For Danone and Mengniu together, we have formed this joint venture company, but we are the one to manage the brand. Danone will send their experts and specialists. Also, they will open up their R&D resources, global R&D resources to us, to Mengniu. With this technology exchange and also the activation of this cooperation, we could catch up with the opportunity of being the leader in the world. In terms of brands or in terms of technology, there are a lot of things we can learn from Danone. We make use of this opportunity to quickly consolidate us and to upgrade us in the leadership position of the yogurt industry. For our formula milk, we are working on the consolidation and review of the formula milk that we have with Yashili. We would like to position ourselves to be a professional or a specialized formula milk product. For Yashili, they are consolidating their listed company's position. For us, our merge recently with them has aroused interest from investors. I think in the coming days, within the existing management team of Yashili, how to consolidate their milk resources in Denmark, etc. We'll focus on how to help Yashili to work on their present work. We have these working on the international cooperation. The fourth part is about 2013 challenges. For the interim results, I would say we are consolidating our foundation, and steadily we seek for growth. We have made quite substantial consolidation in the past, in the recent time, and that we could achieve the sales target, and that our gross profit achieved the target. I think our management team has put in a lot of effort, whether our direction or the foundation that we have, I think we are on the right track. For the management team, we have this strong belief. Still, 2013 is still a big challenge to us. First is about the upsurge of the raw milk price. We have a shortage of milk, and there is overall nationwide shortage of raw milk source, because of the weather factor, weather condition. We'll face challenges of the increase in price of the raw milk price, and for our company, how to quickly respond to this challenge will give us a big pressure. As Mengniu is very focused on the ranches and also scaled farms, that's why our cost on this area is higher than the other counterparts. There are challenges posed for us to how to respond to the increase in raw milk prices. The second challenge is about integrating our acquisition. How to fully optimize the advantage of Danone in Mengniu. How to integrate the corporate culture, how to match up the resources. These are the challenges that we are facing in future. As it is already our future, we need to find ways to how to face this challenge. I think, for this innovation challenges and integration acquisition challenges and price of raw milk sources are also the challenges that we are facing. With China's current media condition, and also that other companies are also launching new products, that it gives us challenges to innovate, whether it's internally or externally, we will work on product innovation. For our innovation session, we don't want to be lagging behind a trend. We hope that Mengniu in the overall, this fast-moving consumer product area, we could maintain our leadership position. These are the several things that we will pose ourselves to meet the challenges. How to cope with the increase in the raw milk prices and innovation and post-merger integration, et cetera. We understand the current market situation can also be very fierce, but we hope that we could try very best to maintain a relatively better result by the end of the year. So far is in a very simple and short way that I present on the results that we have. We hoped you could maintain time for Q&As, as I am told that I try to finish my presentation within 30 minutes. I am faster and faster each time when I do the presentation because you are more and more familiar with Mengniu. That's why in the past results announcement, I will give a more detailed announcement, but now in the coming meetings, I may give you less detail on the result. It is because of your familiarity with our company. I've been with the company for about 16 months. I am very clear about the strategies now and for the management team that we are working along these clear strategies. Second, for Mengniu management team, we are a very excellent team that there are so many moves that we have done, and also so many cultures that we've introduced to the company and how to practically carry out all these moves. We need accommodation of the culture, and we need these efforts. Also in our report, we have conducted a lot of communication with our consumers. We took a brave step, a bold step, to open up this platform that we have more than millions of visitors coming to visit Mengniu. We also have a platform open for anyone who would like to ask me any strangest and weirdest question that they have on this open platform to us. I think after one year of this platform launch, we have worked very hard on this, on how to make Mengniu to be more open, and how to allow more consumers understand better about Mengniu, try to increase the transparency of Mengniu. If you look at overall public relations and investor relations, we have a favorable improvement. For any negative report on Mengniu, there is a general decline in the trend of negative reports on Mengniu. I think throughout this process, we have worked a lot on how to consolidate our values to make us to be a company that really concerned the concern of the consumers. In the past one year, we have also worked with our partners in a very bold way, brave way. Our supplier are also market leaders in the field. In the first half of the year, we'll try to work with the suppliers on how to enhance the supply, and the suppliers will give us advice, and we have quickly respond to their advice and give resources. In the coming days, we would like to concern more on our mutual growth in this interest cycle of our business. How to allow a company to have a steady growth, I think we need to have good value and good culture. Then all the things to be done will be in a right place, I think. After this, all the coming work following up will be how to maintain this continuous momentum. We appreciate any active feedback to us, especially when I see there is any increase in our stock price. It gives me a lot of pressure that drives me to achieve better results. In order not to disappoint anyone on the expectation on our group, our management team is very clear about this. We thank our management team, that in the past more than one year's time, give me a lot of support. In the second half of the year, I see a lot of challenges. Although the challenges are very much, we try very much our effort and try all efforts to solve the challenges, to face the challenges. We hope that in the second half of the year, our team will work even harder in order to have an even better result to respond to the investors who support. Thank you very much.