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Edited Transcript of 2319.HK earnings conference call or presentation 27-Aug-20 1:30am GMT

Half Year 2020 China Mengniu Dairy Co Ltd and Yashili International Holdings Ltd Earnings Call

Wanchai Aug 28, 2020 (Thomson StreetEvents) -- Edited Transcript of China Mengniu Dairy Co Ltd earnings conference call or presentation Thursday, August 27, 2020 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Minfang Lu

China Mengniu Dairy Company Limited - CEO & Executive Director

* Ping Zhang

Yashili International Holdings Ltd. - CEO & Executive Director

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Presentation

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Operator [1]

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Dear investors, good morning. Welcome to our meeting. Welcome to our results announcement this morning. This meeting will be conducted in Mandarin. In the meantime, we have English -- first of all, please allow me to introduce the management team. We have Lu Minfang, Chief Executive Officer; Meng Fanjie, Vice President and Executive Director; Mr. Zhang Ping, Chief Financial Officer; Gao Fei, Senior Vice President; Wen Yongping, Vice President; Chris Kwok, Financial Controller and Company Secretary; [Ling Shou Tong], Vice President; we have Yan Zhiyuan, Chief Executive Officer; Wen Jieping, CFO.

I'm going to talk to you about the agenda. First of all, we have Mr. Lu Minfang to talk us about the 2020 performance. And then we have Mr. Meng Fanjie. Mr. -- we have Gao Fei, Mr. Yan Zhiyuan and Mr. -- and Yan Zhiyuan. Zhang Ping, the CFO.

Next, I will pass you to Lu for the presentation for first half results of 2020.

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

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Okay. Thank you. Investors, friends, good morning. It has been a long time that we have not been able to meet each other, basically. Thank you very much for joining our 2020 interim results presentation.

Today, I think the arrangement is a bit different. Please turn to Page 1 of our PPC. In the first half -- well, actually, this year, there is the pandemic. So we would like to do a brief review. So looking back into first half 2020, the pandemic has brought about huge pressure to us while consumers have been dealt a heavy blow. After the outbreak of the pandemic, at the first instance, we laid set up to enhance the work leading group. And we arranged for all units in the world to anti-infection work and we actively slowed our materials, improving loss and as the protective period to protect employee safety.

So among our 40,000 employees, there is -- no one has been laid off or experienced pay cut because of the pandemic. Most production basis continue the operation. So we are an enterprise, well trusted by Chinese consumers. So during the pandemic, we actively took up our social responsibility, and we donated materials and cash in the amount of RMB 740 million. And in Wuhan, we also donated some supplies. And together with a number of organizations, we started rescue material transfer works. And in Wuhan, we completed the transport of RMB 40-odd million materials for our products. And within 2 weeks, all those supplies were sent to the frontline and saved pandemic personnel.

So we are proud of what we have done because, as you know, at the end of January and early February, the pandemic was still very severe. So we did not only donate materials worth RMB 740 million, actually, during the period, our employees and our working partners, personally sent the material to the medical p.o. box within 2 weeks. So this shows some strong execution capability. We are very proud. Besides what we are proud of is that we protected the whole industrial chain. As you know, during that period, basically, every day, the surplus stocks amounted to 9,000 odd tons, and this is huge pressure. And under this pressure, we did not reject the exceptions of anymore, and we cooperated with our working partners. We helped the upstream industrial chain to ride out the difficulties. Because of the pandemic, the channel inventory was not digested and most channels were affected. In February, we spent extra money to clear inventory. And we actively developed e-commerce and also home delivery business, so that the whole supply chain has resumed normal. Because of all these measures, you can see that at the end of April, for our room temperature liquid milk channel inventory is resumed normal. And there is double-digit growth for Mengniu comparable business. And all channels resumes or recovered almost completely.

And then in May and June, the growth was even stronger. At the same time because we discharged our social responsibility, the brand reputation and word-of-mouth was greatly enhanced during the pandemic. So I would like to take this opportunity to thank everybody who has helped us line our businesses during the pandemic, especially the frontline medical workers. And we need to thank our 40-odd thousand employees because they stick to their position. So thank you, all working partners, so that we can continue to supply our products to end consumers, so that people can benefit from food nutrition.

Now next page, please. If we look back, there are a few important points. Our decision-making was fast and our execution was very fast during the pandemic, because of our decision, then in Q2, our business recovery had strong foundation. For our room temperature premium brands our growth exceeded the peers. Market share continues to rise. So it was enhanced by 1.1 percentage points to 28.2%.

Our share was enhanced. We are #1 in the industry. At the same time, our pure milk also grew 25%. And in Q2, our net profit margin increased significantly. In Q1, premium milk was affected. Then in the future, if you look at Deluxe growth, it is very strong in May. Deluxe dream cap was further upgraded, so it was upgraded from 3.6 grams of dairy protein to 3.8 grams, comparing with 2019. In 2019, Deluxe growth was 25%. In Q2 this year, the growth exceeded 30%. So we have to thank, or actually, this is a display of brand competitiveness. And then if you look at our low-temperature products, during the pandemic, the [LTES 3 seal] was launched, and this is in the low-temperature category. The third point is that for our fresh milk business, it grew almost 100% year-on-year. And then if we do not take into consideration Wuhan, which was greatly affected by the pandemic, the growth was even stronger. Market share continued to rise. And then in June, our market share was already #2 in the industry. For fresh milk in terms of channels, there is strong growth, both online and off-line.

Our online growth in Tmall, JD and so on, we achieved growth more than 600%. And then there are a number of home delivery companies and businesses on which we achieved strong growth. Our supply chain freshness continued to rise [T plus 0] milk products was enhanced by 10 percentage points to 80%.

Next page. Our ice cream business, this year in the first half, we wanted to adjust our brand positioning and to improve product structure so that selling channel can be reinforced. Our operating profit margin increased by 5.7 percentage points. And then for the cheese products, there is growth. Retail was very outstanding. Both revenue and net profit achieved 3-digit growth. And then for our future strategy, actually, in the first quarter, we made adjustments to product structure and brand positioning of formula milk. In Q2, we recovered in terms of profit margin, and then for Yashili business, there was 25% growth. And during the period, we have strong growth in Mengniu as a whole.

So we were brave in fighting the pandemic, and we have raised change. We lead the industry in recovery. We continued our high-quality development. So that high-quality of life for consumers. So for the first half, I think our team is very, very confident in what we have done.

Now I would like to talk about our financial highlights. Yesterday, after the announcement -- you have read the data already. So looking at the first half, operations and financial performance. Our financial data included Junlebao that was the dispose off in November last year. Last year, in December, there was also the acquisition of Lion the data included. So in first half, revenue was RMB 37.53 billion, including Junlebao, down 5.8% year-on-year. And net profit attributable to parent company, $1.21 billion, down 41.7% year-on-year.

In order to enable you to have better understanding of our business growth, let's turn to the next page. So here, you can see financial highlights for comparable business. In the first half, we achieved revenue of RMB 36.89 billion, so up 9.4% year-on-year, and sales volumes increased 8.2% structure and price positive contribution, 1.2%. This growth rate is better than our expectations in March. At the same time, it is expected that for comparable business in the first half, revenue slightly declined or remained flat. GP margin in the first half was down 30 basis points to 38.9%. So in the first quarter, we cleared inventory and at the same time, there was impact from price structure on price discounts. Our operating profit margin down 2.5 percentage points because in Q1, we spent extra money to handle -- accept channel inventory. So that's a one-off impact. But then the pandemic, during the Chinese New Year, which was the busy period, so we hoped that we would be able to clear inventory, and we have completed the work and the outcome was much better than our expectations.

In first half, comparable business, net profit was RMB 1.158 billion, down 42.1% until the attributable net profit -- net profit was $1.211 billion, down $41.7 million. Because in early June, when we gave earnings warning, but at that time, attributable profit was down 45% to 60%. And in June, our revenue grew very strongly in Q2. Profit margin also improved on a year-on-year basis. And also the main joint venture companies, for example, Modern Dairy and so on, was better than expectations.

And so we have procured some antivirus materials. And all the -- well, the amount of money, the impact arising from that exceeded $1.4 billion. So basically, our performance was better than our expectation at the beginning of the year. In order to enable you to have better understanding of the impact of the pandemic, let's take look here.

In Q1, despite the pandemic, we're still able to achieve a fat business from -- in Q2, there was 19.2% growth. So this is growth in sales revenue. And if you look at operating profit margin, in Q1, there was a slight pause, however, in Q2, operating profit margin reached 6.7% comparing with the same period of last year. That was a growth of 2.7 percentage points.

So you can see that our Q2 business recovery was quite satisfactory. Just now I said that all the impact during Q1 was one off. I'm not going to repeat the point. But for Q2, our business growth and our selling expenses ratio is such that our cost control is good and all the costs and expenses are on a reasonable level. So that's why there is significant improvement in our operating profit margin. If you take a look at our various categories, that is liquid milk, ice cream, milk formula and cheese. You can see that liquid milk grew strongly. Ice cream in the first half, there was some adjustment. So growth in revenue only 2% for mix formula but this includes salary. In 2019, there was no Junlebao.

So here, you can see the overall sales. So there is an increase by 29.8% later on. There would be a presentation on Yashili business as well for other products and cheese, up 41%. Retail cheese was very strong for pasturing cheese. There was some impact. So this is a revenue breakdown by segment.

Then if you take a look at our cash flow and CapEx. Here, you can see that we have set out Q1 and Q2 without Q2. Net cash from operating activities grew strongly in Q2. There is the RMB 3.8 billion operating cash in the first half. There is strong growth in operating cash flow. And this includes all the one-off impact. So overall speaking, our operating cash flow enjoyed good growth, 32% growth. This is very good. This shows that our operation is very healthy. And then CapEx, during the pandemic, apart from the building of the Wuhan fund, which was affected in all other places, our fixed asset investment and capacity expansion was almost in line with our original plan for 2020. So CapEx was RMB 1.68 billion. This is in the quarter with our plan at the beginning of 2020.

Next page, SG&A expenses. So here, you can see Q1 and Q2 data. In Q2, SSD expenses resumes normal. So it was down 1.9 percentage point. And if you include the one-off investment, the SSD ratio was 30.6%. G&A expenses, it continues to come down by 30 percentage points to 3.8%. During the pandemic, we minimized business trip or traveling expenses. So here you can see a pretty healthy level.

Next page, I'm going to talk to you about the operational efficiency impact. And as you can see this is all very good. In terms of our turnover, inventory has increased. This is because in beginning of the year, we have accumulated imported powder as well as for the Chinese New Year. And so far, for all the milk powder, we have divested most of that to a healthy level.

In addition, for our inventory level by end of June, it has returned to a normal level. So I have simply walked you through the financial situation. And now I think it's still very important for you to understand about our 2020 strategic priorities. When the pandemic started during our discussion, we have also formed our strategy even if the pandemic has an impact on our strategy, but we also hope that we are going to stick to our 2020 priorities and for the 2020 to 2025 period. So we have 6 important aspects. The first one is the upgrading of the brand proposition. And second is to continue to build a RTM revolution; number three, strengthen raw milk sourcing; number four, cost saving; and number five, our digital ability; and number six, what we are going to do after the acquisition.

So now I'm going to walk you through them one by one and as well as our achievements. Number one, in terms of our donation, our donation as well as the retail that we are carrying with, you can see that has actually helped with our sales. And during our procurement, you can see because of our excellent performance in donation, our brand has enjoyed a very good reputation.

In the meantime, we have our Chinese characterized marketing, and it has actually caused a lot of discussion online and again, rejuvenated the brand among the young people.

In terms of our revolution or reform in terms of channels, we continue to push forward our work in this area, for example, we continue to improve the coverage of the liquid milk. In terms of empowering the distributors, we continue to promote smart network systems that refine channel management.

Another highlight is that we -- our previous model of penetration into towns and villages, we have already seen great results in Hunan and Anhui provinces. We already have increased 150,000 point of sales within the first half of 2020. And again, this is a new model that has assisted us securing with the online help, and this is a model that we wish to promote to the whole of the nation.

Similarly, in the new retail, here, we have also obtained good results for e-commerce. You can see, we have seen good results, number 1 sales, on 618 Shopping Festival, O2O home delivery during the pandemic. We have created over 100,000 retail groups, during the pandemic, to drive community sales. So all these new channels have also helped to promote our sales in the first half of the year.

Number 3. Actually, during the pandemic, in terms of the decisions that we have made and to continue to expand. You can see that at that time, there was a lot of pressure, but now looking back, these were all the right decisions in terms of we continue to exert more control of the source of milk. And now looking at this, in both China and overseas in terms of the coverage of milk sourcing as well as in Mongolia, in Hubei, Shandong, in Heilongjiang Province, we have already successfully established new milk farms and continue to exert our influence in this area. And you know that modern farming, we have already become the largest shareholder of Shengmu, and they are also the largest organic milk, raw milk sourcing. In addition, we continue to improve our business efficiency. So these farms for the first half of this year, they have seen great operations, and they have also increased the raw milk supply to Mengniu.

Moving on, I'd like to talk about the organic milk demand. It is very strong at the moment. So after exercising our shares' right and becoming the largest shareholder, we will continue to push forward the development of organic milk. In the meantime, in terms of our full chain cost savings, this is also a very important part for this year, from design-to-value initiative. We will be driven by consumers and putting consumers in the center, so that our products are closer to the consumers, and our products can reflect the true value. So from this perspective, whether it is from the product perspective or from the consumer's perspective, this is why we can see that our gross margin despite during the pandemic, we have invested so much, our gross margin is still at a very high level and Q2 gross margin is even higher than that of Q1. Again, this has solidified an even healthier development foundation.

Number 5. In terms of improving our digital capability. We have a dedicated digitalized team. We have 6 areas to push forward to the overall group development. And this year, we will be focusing on the digitalized and precise advertisement, omnichannel consumer-centric operations. Number three, 1 pack 1 code. We have established a bridge to interact with our consumers. And also, we will be using the big data and establish a big data platform, going forward, for all our communication with the consumers and in terms of improving our efficiency, it will become very smooth.

Number 6, last page. This is about the integration and synergy. Since last December, Bellamy's joined Mengniu family. We have carried out overall integration of Bellamy's and as a very important part of the international business of ammonia, Bellamy's continue to strive for pursuing an extreme organic and natural or organic brand, we continue to have our Chinese management team to be strengthened and to build a solid foundation for the domestic business. In May, we have launched the first super extreme A2 organic milk. And in June, we have launched the super high-end organic goat milk. Right now, we have also launched a Chinese version of baby rice in March this year, and it is being sold very well.

In the meantime, Bellamy's has already received the Chinese formula registration approval. And the first Chinese version of the baby formula milk will be launched efficiently in the second half of August in China.

So again, this has completed our omnichannel deployment of both online and offline. So we believe that with this new product in the second half of this year, we will see even better expansion. In addition, I would also like to mention about the termination of Lion Dairy acquisition. And this I believe that you have heard quite a lot about the reports. Acquiring LDD, we hoped to build a very complete and competitive pacific and Southeast Asia business. And it was in line with our strategy. Even if in the end, we did not succeed, we feel very regretful about this. However, in terms of the supply chain, basically, it's because LDD has their own local business and in Australia, in terms of the supply chain arrangements, we have not stopped our work in those areas. So even if it is -- with regret that we tell you this, but since we are trying to go overseas. And of course, we will see the big wins and waves coming our way. So we were prepared. But this year, I can tell you that we still have very stable milk supply chain in Australia and New Zealand, and we will continue on our path of determination for internationalization. And we will work very hard on the existing business that we have and utilize the domestic and overseas 2 markets, 2 resources and to help the China and world milk to go on to a better development role. And last but not least, I would like to mention this.

You can see that Mengniu was selected into the Hang Seng Corporate Sustainability Index in Han Seng ESG 50 index. So far, we are the first Chinese milk company that has been selected, and this is well reflecting the past 3 years of our work in environment, social and economy. And we are working and been following -- we are following the United Nations 12 sustainable goals in Mengniu. We have specifically allocated a committee for this. In addition, in Mengniu, we have a dedicated execution team to make sure that they follow-up on the development in this regard. And I believe that in the future, we would be able to implement all of this in terms of our national level green factories and build 2 smart factories to embrace digital transformation. And I strongly believe that if we can roll out our strategy plan, it will help us with our long-term sustainable growth.

Great. This is my simple introduction for the first half of this year. I now will pass the floor to the Yashili team to talk to us about the Yashili performance. And last but not least, I would like to thank you all for your support. Our management team are full of confidence. We believe that the pandemic's impact on our business is limited. In addition, for the future outlook we're very positive. Thank you.

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Operator [3]

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Thank you, Mr. Lu. Ping Zhang, you can start.

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Ping Zhang, Yashili International Holdings Ltd. - CEO & Executive Director [4]

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Thank you. Investors, friends, ladies and gentlemen, good morning. Now I'm going to report about Yashili.

So let's refer to the half (technical difficulty) financial highlights in first half 2020. Here, you can see our revenue came down by 5.9%. Gross profit margin, 37.8%. It came down 6.2%. Profit attributable to owners, CNY 35.6 million, up 3.8%. In first half, here, you can see revenue came down 5.9%. There are a few reasons. Well, we consolidated our businesses. Besides, we focused on a number of brands and products, and we phased out those products with no efficiency and effectiveness, so there is quite good performance. In Q2, we already achieved growth. For GP margin, there's a decline by 6.2% because in the first half, the (inaudible) powder increased, and we made some adjustments to dissolvable products, so there is some impact. Attributable net profit experienced good growth. That is because of improvement in efficiency in [S&P] expenses. For operating starting [2017]. In first half, there was a [north] of [CNY 414 million]. And now we continuously improved, and it reached CNY 12.5 million.

Sales revenue breakdown. Milk powder and other products came down around 9%. This is because of our core product enhancement or upgrading was launched in July. But after July, actually, the situation was more or less the same as that here. And it is about our new brand, Reeborne. If you talk about business result achievement in Q1, because of the pandemic, there was adjustment or correction in our opportunity. After that, we experienced positive growth. In Q2, there is strong growth by 25%.

Next page, comparing between Q2 and Q1. So here, you can see Q2 grew 27% compared to Q1. And then because of some adjustment to our brand positioning, we started to see a good trend. For OP margin, there is a growth by 17 percentage points from Q1. So starting Q2, no matter whether we are talking about revenue and profit, there is good improvement, and this trend can be continued.

Next page, cash flow and CapEx. Cash flow from operating activities. There is an outflow of CNY 47.8 million. So comparing with the same period of last year, there is a reduction by CNY 145 million. (inaudible) inventory efficiency. We have reduced the [occupational funding] in occupancy in inventory. Then also, there is increase in CapEx because of the newly sold plants and also production capacity expansion. And then you can see here, S&A expenses. And the expense ratio came down from 35.2% from 2019 to 26.8% in 2020, down 8.4 percentage points. This is mainly because we optimized the utilization efficiency of selling expenses. And according to the market situation, we made adjustment to our brand strategy, so we invested less. Then in terms of administrative expenses, there is a year-on-year decline. This is mainly because of our back-office operation efficiency improvements and organization structure improvement.

Operation efficiency indications, next page. If you look at inventory turnover, the turnover days decreased from 163 days to 151 days because we improved inventory management efficiency and we reduced our excessive occupational inventory. Then receivables turnover, more or less the same as same period of last year, so this is good. During the pandemic, we did some structural preparation or provision. And here, you can see payables turnover increased 15 days. That's about first half 2020. So from Q1, you can see there's some decrease. But in Q2, we have seen growth. And we believe that second half of this year will be better.

And now I'm going to talk to you about the outlook for the second half of 2020. There are a few challenges. So the pandemic will have a series of impact, especially on the supply chain and -- as well as the source of the products and the price of the raw material slowing up, which brings pressure as well as the overall number of newborns decreasing year-on-year. So right now, the baby formula milk has entered into a stage of the stock inventory gain existing market.

And now in terms of the organic and goat milk segment, we can see continuous growth. In addition, with the aging population, we continue to have bigger opportunities with the adult milk. In the current industry, we can see that the consumers have restored their confidence in domestic brands. In terms of their buying channels, buying decisions and demand scenarios, they have a diversified features of their demand. And to combine with the brand features, and we can focus on our target customers and to carry out targeted marketing. In the meantime, the market competition is very fierce, and the concentration level in the market continues to improve. We can see that e-commerce as well as the mother-and-baby industry is -- are the main growth channels of the industry. And e-commerce will continue to be the very important channel for this part of the growth.

Next page, please. For the second half of this year, we continue to surround our two main keywords, which is focus on innovation. For focus, we will be focusing on building a trend, establishing our advantages. For example, at our Reeborne and Arla Organic, we will focus on our core areas, core regions. We have already completed this work. In terms of the innovation, for example, the model innovation, we have already empowered our models by digital methods.

And now I'm going to talk about our Star Brands. And first of all, there are 3 brands that we focus on. The first one, Reeborne. And we are establishing this as a breast milk-like milk formula, which provides the products with a lighter taste and more nutritious ingredients. And since July, we can see that the performance is very good. And this is a great trend that we're building for Arla for this whole year. We have strengthened this organic dairy product in a world that it is world leading. And we continue to work with the media and to have advertisement and to deepen the awareness of the consumer. In the meantime, we have Topconic's and it enjoys the health care product certifications, this is a product that has already been launched. We are now working on the continuous promotion of this product so that this product could bring a lot of growth in the adult milk industry. And this is also a brand that we are focusing on.

Next page. Let's take a look at the core areas that we focus on. The core areas. This is a strategy of us this year. We want to establish our core competitive areas. So a few different layers, and the first one is to have intensive media coverage. Second, we will expand our point-of-sale. We will see a great increase of point of sales. We will also set up model stores to build these model stores. Number four, we will recruit more new customers as well as repeated sales. Number give, we will strengthen our collaboration with the regional distributors so that the distributors could work with us hand in hand. In addition, we also emphasize on the empowering of the distributors. So far, this strategy, I believe, this year should see our growth doubled.

Next page, please. Number three, focus. Focus on e-commerce and mother-and-baby chain store channels. For e-commerce. Again, this is a channel whereby we see a lot of growth in the mother-and-baby chain store is another major channel. So these 2 channels -- in terms of the building of these 2 channels, we need to establish a long-term strategic collaboration. We also have an independent e-commerce team. It is more efficient. And there is a connection between off line and online. We also have a guide shopping service management. In terms of customer service, we have continued to train a professional service team, and to help them -- to give them authorization and ask them to solve the customers' problems as their guidance of their work and continue to work with them. And we have also further expanded our model towards building with e-commerce as well as the mother-and-baby chain stores. Apart from the organization innovation, model innovation is also an important part of our work for the second half of this year. We hope that, for example, we can establish a membership credit system, and to add value to their digital assets to empower the consumers. Second, through building an interactive distributor platform and terminal marketing platform to create a closed-loop business in order to lower cost and enhance efficiency to empower the distributors. And actually, this year, you can see that with the pandemic, our distributors. We have built up an omni-channel or omniaspect of empowering for the distributors. And number three, to empower the stores to launch online business and carry out digitalization upgrade to empower those stores, including, for example, on the 10th of July, that was helped with our internal online empowering, and we can see the result is very good.

So we stay above. We hope that we would be able to become more competitive in terms of the models. So I have walked everyone through the Yashili's strategy for 2020 as well as our strategy for the second half of 2020. For second half of the year, we will continue to work hard. We will speed up our work and we will try our best to return the support of our investors. Thank you.

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