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Edited Transcript of 2319.HK earnings conference call or presentation 29-Aug-19 1:30am GMT

Half Year 2019 China Mengniu Dairy Co Ltd and Yashili International Holdings Ltd Earnings Presentation (Chinese, English)

HK Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of China Mengniu Dairy Co Ltd earnings conference call or presentation Thursday, August 29, 2019 at 1:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Minfang Lu

China Mengniu Dairy Company Limited - CEO & Executive Director




Unidentified Company Representative, [1]


Dear investors, dear friends from the media, good morning. Our result announcement is about to start. Welcome you all to the 2019 Interim Results for China Mengniu Dairy Company and Yashili International Holdings.

Now please allow me to introduce management's team on the stage to you. We have for Mengniu, Chief Executive Officer and Executive Director, Mr. Lu Minfang; Vice President and Executive Director, Mr. Meng Fanjie; Chief Financial Officer, Mr. Zhang Ping; Vice President, Mr. Gao Fei; Vice President, Mr. Wen Yongping; Vice President, Mr. Li Pengcheng; Financial Controller and Company Secretary, Mr. Chris Kwok. From Yashili, we have Chief Executive Officer and Executive Director, Mr. Chopin Zhang; Chief Financial Officer, Ms. Wen Jieping. Thank you, management team.

Now I will walk you through the agenda today. First of all, we have Mr. Lu Minfang, CEO of Mengniu, to talk to us about Mengniu's results as well as latest development, followed by Mr. Chopin Zhang to talk to us about Yashili's performance.

After those presentations, we will arrange a QA session, and we welcome questions from all of you.

Now we give the floor to Mr. Lu -- to welcome Mr. Lu to walk to -- walk with us -- walk us through the result announcement of Mengniu.


Minfang Lu, China Mengniu Dairy Company Limited - CEO & Executive Director [2]


Dear investors, friends from the media, good morning. I'm very delighted today because August, this month is a great month. 20 years ago, on the 18th of August, it was the day that Mengniu was established. So now Mengniu is 20 years old. So at the 20 years birthday of Mengniu to give you the presentation of the results, we are very delighted, and I believe that a lot of you pay attention to our results.

And we have a lot of investors here today, who have invested in us for a very long time. And today, I'm going to share with you for the 20 years -- past 20 years Mengniu from a small company in Hohhot and today, we have become global dairy company, top 10, and this is history and miracle. And we all know that when we first started, we were simply in a small room like this, we had about 4 to 5 office desks. And we were listed in 2004 on the Main Board. 2014, we were included into the Hang Seng Index.

So for the past 20 years, our CAGR revenue growth of 46%, and our growth in market cap, 17x. But of course, since I joined the company, it has also grown very rapidly, and I need to praise myself.

In addition, I also want to share with you today our performance in terms of financial performance. And I think just one sentence can summarize this very well. I believe that our team and our business are becoming better and better, and I believe that going forward, we have a lot to look forward to. And now I would take some time to walk you through some of our performance behind those financial highlights. And of course, from the financial highlights performance -- perspective, our top line grew by 15.6%, slightly high. It is higher than our expectation for gross margin from 39.2% to 39.1%, so stable level. And you might wonder why it's come down by 0.1 percentage points. Actually, for Mengniu, apart from Junlebao, our gross margin did not fall, it is the same.

So you may also be concerned or you may also be -- pay a lot of attention to our margin, so that is the explanation. And in terms of our operating profit, it has gone up by 24.4%. For our EBITDA and as well as our net profit, we have seen that it has increased to 33% and we can see that actually our half-year results is very good. Yesterday, we had our Board meeting and all the directors, they were very happy with our performance. Everyone is very satisfied. In beginning of this year, I had told you that usually speaking, I would set a high target for the team. For the market, I will give the market a lower expectation of what I give to my team and for my Board, I will give them an even lower expectation. And looking at first half of the year, it has followed exactly our logic. Therefore, our internal target, yes, we have achieved the high internal mark -- targets that we have set ourselves.

In terms of the margin, one of the main changes this year -- first half of this year, the milk price has increased higher than our expectation by about 5% to 6%. However, thanks to our structure changes, our high-margin products growth is very fast, and it was able to offset the factors from the increase of raw milk cost, and in addition VAT has also helped for Junlebao business, which is to be disposed. Actually, its margin has come down by 1.3%. So this is a relatively big drop when it comes to gross margin.

For Mengniu's perspective, as I said, we did not decrease, and it is the same. And in addition, our joint venture business are also doing well. For example, Modern Dairy as well as Yashili, in terms of profits, they have all done quite well and contributed to Mengniu Group.

Second part, I want to talk to you about the sales distribution. And you can see Liquid Milk growth by 14.4%, and this would be the faster growth within 6 months for the past few years. Second would be Ice Cream. Ice Cream is lower than our expectation, but this comes from our active restructuring. We hope to shuffle things around a little bit for our business, and this is related to the changes of our structure. For milk powder, it has grown by 43.8%, and for Yashili, its growth year-on-year is 16.6%. Again, Milk Formula is growing well compared with the industry, which is low growth and single digit, we are doing quite well.

For Liquid Milk, it mainly comes from a few of our important products for Milk Deluxe, over 22%; Just Yogurt, 24.4%; White Milk, 19% increase. So our main joint -- main force and the main products are growing well. And for Fruit Milk Drink, it's also growing quite well. So these key products are growing very well. And outside, you can see our new products. For example, our organic as well as our Milk Deluxe, and we have realized a comprehensive upgrade, and which has injected new momentum of growth for our milk business. And this is for products.

And now going into market share. Market share, we continue to grow steadily, whether it is UHT, Chilled Yogurt, Fresh Milk or in E-commerce, it is all growing. So you can see that our UHT has grown by 0.2% market share. For Chilled, we have grown by 1.5%. And for Fresh Milk, we are already #3 in the market. And for retail, we believe that by end of this year, we'll become #2 in the market. And for E-commerce, we continue to lead the industry and with the fastest-growing business, we continue to expand our market share.

In terms of our operations. Our net cash compared to last year, slightly down, 2 factors. On one hand, you can see that our innovative products are being launched into the market very quickly in addition with our production. Actually now, we are short of production capability because our growth is -- has exceeded our expectations. So the growth of CapEx for first of this -- half of this year is already reflected. In addition, the downward trend of net cash is because our upstream for the milk in order to ensure our milk supply, and we have paid our upstream milk suppliers in advance. Overall speaking, if we exclude this, our operation cash flow compared to last year would remain the same. And again, we feel very happy that this is a good result when it comes to the cash flow. In terms of the expenses and you can see that it has come down by 50 basis points, even if in this market, you can see that with our advertising and promotion fees, we have done quite well. The G&A is relatively low. It's because our efficiency is actually quite high and I can tell you in detail later about what we have done and in terms of SG&A, is roughly the same and up by 0.1%. So from an operations perspective, we are actually above our expectation. In terms of operation efficiency indicators, not many changes. For inventory, we continue to reduce it. And for Milk Deluxe, actually, now we are short of the supply of Milk Deluxe. And if you want to buy more, perhaps, you need to have some slips written by Mr. Gao for you.

In terms of receivables, we have seen receivables increase by 1.1 days. This is within our RTM reform. And in terms of the overall receivables, we have not seen any major changes. So those are some of the indicators that we walked you through, and I believe that you have also read about those in the results announcement, PPTs, and if you have any questions, I'd be more than happy to take them later on.

And now I still want to talk about 2019. For our high quality development, if you want to add an adjective in front of the high-quality development, what would that adjective be? It would be our self-striving, and we want to achieve this out of our own initiatives, and I want to tell you why we really want to be down to earth and really do well in our business.

In terms of challenges and opportunities, I will not talk much about this. And this year, perhaps there's a one thing that's new, which is the change in milk price. And for the rest of it, I don't think that there have been any major changes in the market. With this backdrop, with the growth of the market, and I believe that this is still very strong. And milk industry in China as an industry still has a bright future.

Now let's talk about our strategic focus. How do we get strong and enhance our core capability? There are 6 areas: first, branding and then sales, digitization on the supply chain and organization and culture.

Allow me to share with you how we ensure Mengniu will sustain long-term, high-quality, sustainable development. First of all, concerning improvement of our branding. First of all, our mother brands are holding on to the best sports-related platforms. Anything you can name, any top events, they are covered. NBA has been collaborating with us for 12 years. We are also the partner with Disney, Universal, and there are many very famous brands around the world who work with us. For subsidiary brands, we are also investing very heavily. For Milk Deluxe, we achieved great breakthroughs.

We are now part of many people's lives. We have big IPs, bring us very brand -- very big brand enhancement opportunities. And then we have also entered some singing competition on TV for Just Yogurt towards the end of last year. All the biggest IPs have been signed. So you can see the results already, and the efficiency continues to improve. So we're spending the same amount of money, but we are seeing greater growth of our business.

So whether it is about sport events or brand upgrade, we have done very well. Concerning the sports side, they are more long-term and with limited risk in terms of our investments. So we are very confident that in the coming years, this is going to become even more effective. The another point is about enhancing our sales capability. This year, we have done a lot to reform our RTM.

Are we a big operator? Do we do direct sales or do we explore into new areas? We have to consider our consumers in 5 or 10 years' time. Where will the money go? And then we can reconstruct our RTM platform according to future growth. We have first-tier; second-tier cities; super large cities, towns and villages. We have different channels. We have put together a new RTM strategy, and we have put together a 5-year road map so we can do it step-by-step, year-by-year. So we have redesigned our supply chain model. We have enforced our POS coverage. We have also optimized our sales force structure so that we can have higher level of capability at the time. And that is not just about supermarket or convenience stores, but all the POSs, wherever our consumers are going, in airlines, entertainment venues or other consumption scenarios. We are working on the changes. So this year this is going to be the biggest project. The group has invested very heavily onto this. I would like to single these out. So concerning the Smart Network project, we have already completed it and we have 67% coverage by the end of June. And we have midstream capability enhancement. We have deep analysis of our business data and we have conducted this enhancement of B2B format. Rather than collaborating with others, we are doing something on our own with very wide coverage. In 3 to 5 provinces, we have already completed the model, and we will continue to cover it, including the entire country. And many POS will go through automation of ordering and delivery. So this is going to bring us a lot of positive impact.

Our B2B network coverage. We are talking about 1.4 million POS nationwide. That is really good outcome. Our sales capability this year, especially for UHT products, the results have gone beyond our expectation. Today's reform is about quality and quantity, so that we can ensure in the process of reforming, we are not just focusing on our dealers and channels, we have to launch different reform measures to ensure continuous and protected growth in the future.

And then we are talking about digital capabilities other than the conventional way of doing business. Today, we are investing a lot into our own data bag. We don't just use data from JD.com or Ali. We have already completed such automated and comprehensive design. This is really good news. We have done a lot of labeling for our consumers. And after that is done, we are more digital and more effective and efficient. We have already done a lot of testing. We are talking about 40% increase in terms of efficiency. In other words in the future, we can use our expenses more effectively, including [PDV] investment. All these are breakthroughs.

And of course, for e-commerce, we're doing very well. We're moving along very quickly. And I have been talking about our products on e-commerce platforms. There are no excuses. Consumers want to buy them on e-commerce platforms, and you need to deliver that. Doesn't matter we like it or not. And 30% of our sales will come from e-commerce platform. So we have to construct our logistics platform and data platform so that we can better serve our consumers. So we are a true forerunner.

Concerning further details, we will share with you in due course in the future. So this is truly a huge breakthrough.

Other than digital capabilities, we are strengthening other areas of our capabilities. For example, our online offering for fresh dairy products, they have already been launched in eastern region of China.

Number 4, we continue to strengthen our R&D capability in terms of talents at the group level, also at other levels, we're talking about a number of key capabilities. For example, we build our key technologies, and product innovation is very important. Homogenous competition will not create great profits to us. So we need to focus on functional offerings. We need to do more R&D and offer a more relevant products to our consumers. We also established international cooperative platforms and develop sustainable packaging. Because we're talking about beautiful China. And people now attach more importance to recycling and environmental protection, so all these matters drive us to think ahead of our competitors.

In terms of product innovation, we are doing even better. For example, UHT yogurt offerings are doing very well. If you have tried our new products launched this year, you should know they taste really good. So at the end of the day, you have to rely on your products. So if you have time, I'm not sure if we have brought them today, but please do try Just Yogurt with grapefruit flavor, yellow peach, oat flavor, they are really, really tasty. Once you have tried them, you will know that they are more outstanding.

Another shining point for our performance, yogurt. And this month, we have launched a coffee option, pure milk, coffee, no water. Not even one drop of water, and it has very low sugar content. So please do try them. Maybe you can't buy them here, they have just been launched. But I drink it every day, at least one bottle a day.

We have more and more milk-related offerings coming onstream. So in terms of our products, they are very capable in driving forward our business.

We need to continue to improve our product mix, improve customer experience to achieve greater benefits.

Number 5 is about operating capability. Concerning our business, about 2, 3 years ago, at our ranches, we have done different things. And today, the results are very well proven. Perhaps the milk price increase without these efforts a few years ago would have gone even higher. If you look at the sources of our products, quality is the key. Organic milk of Shengmu was definitely #1. Fresh milk from China Modern Dairy is also very well recognized. So we have to stay focused and continue to ensure we have the best milk source.

Concerning our ranches or collaborating ranches, we have to maintain high quality of the raw milk. When I met with our partners in Beijing, I asked how come it's so tasty. The answer was simple, get the best raw milk, make sure the processing does not damage the original taste, then it's, of course, very delicious. Just control well your technology and the source. At the time when we carried out such work, the capital market did not really approve us. But looking back today, this year and the next 2 years, I'm sure that long-term drivers will be very well supported.

And then when it comes to our capacity, we are talking about more than 79% of utilization. So concerning Mengniu's development, we have to reconsider our capacity. What we said 3 years ago is running at the moment very well, so what about the next 3 years? If we are using 15% as the growth rate, how can we achieve higher level of efficiency so that when we continue to develop, we will come across cost-related problems or capacity problems. So in terms of operating capability, we have to do more.

Organization-related efforts. I won't go into this. We need to focus on our talents, our sales people and how they are treated. So this year is our 20th anniversary. So we have proposed a new employee happiness plan. So that 3,000 of our staff members can enjoy the benefits of Mengniu's development. So we hear a lot about the well-being of our staff. For example, if you have elderly people at the age of 60 or more, they can get milk for free. If you have one more child, we can give you 1 additional month as your holiday. So all these initiatives may not create short-term financial benefits, but definitely, there will be longer-term benefits.

Such incentives can allow our employees to benefit, not just senior management staff because we have this internal saying in Mengniu, "Sometimes you can only retain people with non-financial means." So we continue to attach importance to our corporate culture. While we expand our business domestically and also offshore, we need to bring on board more and more talents. When I interview talents, many people are very passionate. They want to join this platform. They want to join Mengniu. So that we can create a brand for China that is truly premium, truly international. So that's all from me today concerning the first half of the year. I don't know if our stock price has gone up or has declined after my speech.

Now I will invite my colleague from Yashili to talk about what's happening to Yashili. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]