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Edited Transcript of 3799.HK earnings conference call or presentation 28-Aug-19 2:00pm GMT

Half Year 2019 Dali Foods Group Co Ltd Earnings Call

QUANZHOU Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Dali Foods Group Co Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Conference Call Participants

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* Henrietta Seligman

Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to -- joining Dali Foods Group Company Limited investor and analyst English conference call for the 2019 interim results announcement today. The attending management today are [Mr. Kenneth Huang], Investor Relations Director; Ms. [Alicia Guo], Investor Relations Manager. On our conference call today, Mr. [Kenneth Huang] will walk us through the 2019 interim results of the company. (Operator Instructions)

Now I'd like to invite Mr. [Huang] to start the presentation.

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Unidentified Company Representative, [2]

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Okay. Well, thank you, operator, and good morning or good afternoon, or good evening, to our audience, whichever applies. I'm sure that you have gone through the numbers. So I would like to start by saying that the first half 2019 was -- come out of the debt that was the second half of 2018 then actually achieved growth on a high base that was the first half 2018. And especially what's worth mentioning especially is that since second half 2018, Dali Group has started to revamp our sales system. This process began in August 2018 and complete by the first half 2019. In the course of this revamp, of course, there was a disruption to our business as our sales team got reshuffled and the task, then priorities got realigned. But what's more important is that the positive results of this revamp or reform are beginning to show through and will continue to do so in the coming months or years. We believe that this strategic move has laid a foundation for our long-term growth, and we'll talk more about it later, but this is just sort of a backdrop introduction to brief you on what we have done in the first half this year.

Then coming to the numbers, of course, as you can see, our revenue has reached CNY 11.13 billion, approximately 1% growth over the same period last year. Our gross margin has reached CNY 4.5 billion, a 5.1% growth. GP margin reached 41%, 1.6 percentage point increase. Net earning reached CNY 2 billion, a 5.3% increase. Net margin reached 18.6%, 0.7 percentage point increase. And our net cash increased to CNY 12.34 billion, which is a 19.2% increase. And based on our operational and financial status, the Board has approved for an interim dividend of 50% plus 50% special dividend, so combined payout ratio is 100%, which represents a 48 percentage point increase over the same period last year.

And if you look at the revenue from our main business, which is our food and beverage business, we are at par against the same period last year. Total revenue from food and beverage reached CNY 10.4 billion. Revenue for food business reached CNY 5.18 billion, a 1.6% increase over the same period last year. Beverage revenue reached CNY 5.24 billion, a 1.4 percentage decrease over the same period last year.

And if we look at all 6 major categories over food and beverage, with the exception of herbal tea, all the main categories have seen growth over the high base over the same period last year. And our profitability has further been improved. The GP margin for our food business has reached 37.1%, a 2.1 percentage point increase. And the GP margin for our beverage business has reached 50%, a 2.3 percentage point increase. And this was largely due to several factors, such as the decrease in raw materials and packaging prices and also a continuing improvement on sales mix as well as cost control.

And now to elaborate a bit more on our sales system revamp, which as I mentioned, started in last August and finished by June this year. This is a very important strategic move for the group. The rationale behind making this move was because in this day and age, we find that the consumer community has become increasingly diversified. Each group of consumers has a different or distinct consumption patterns and preferences and therefore, suppliers like Dali Group is required to provide more tailor-made products with matching packaging and pricing and marketing strategies that cater to the specific preferences and demands of each different groups of consumers. And because Dali has a multi-brand, multi-category strategy, which is our core strategic advantages, to better take advantage of this advantage, we need to also increase the matching between our product and our sales channels. And under the old system, our sales teams were roughly divided into 2 groups, one for food and the other for beverage. And this system does not play well in aligning our teams of -- our sales teams and our products versus our distributors and their sales channels. And this doesn't play well to -- for us to take advantage of our multi-brand, multi-category strategies. So we decided to revamp the sales system. And under the new system, our sales teams are regrouped by the sales scenarios.

Now we have an independent KA team and e-commerce team. And then also the under the food categories, we have set up a snacks food team, breakfast team and modern channels steam.

Under beverage, we have set up a RTD drinks team, family consumption team and modern channels team. The advantages of this new system is that -- are several fold. For our sales team, they are more clearly tasked with each -- with supply, with the resources allocations and they are able to match our different products against their saleable channels. And for our product development and marketing, they're now able to develop products by categories, by different channels to match the individual requirements of different consumer groups. So we are able to develop products in a more tailor-made approach with clearly defined but differentiated pricing and packaging.

For our distributors, they have become more professionalized with higher operating efficiency. In this way, we are also in a better position to help our distributors to improve their business. So overall, this new system enables Dali to take better advantage of our multi-brand, multi-category system advantage. And as I said earlier, the positive results of this reform will start to show in the coming months.

And if we come to look at each categories, let's start with soy milk. Doubendou continue to lead the industry. And after 2 years of launching, we have achieved remarkable results. For the first half this year, our revenue for Doubendou is close to CNY 1 billion. But having said that, we have also realized that we are faced with a challenge, and that challenge is that currently consumer education is still a big task. We find many consumers have a rather traditional perception about soy milk. They -- especially those consumers that are residing in the lower-tier cities, they have a rather low product expectation and therefore, also pricing expectation for soy milk. And in this area, we are lacking in terms of product and also channel resources.

So here we also see an advantage as well as a challenge because the breakthrough lies in seizing the breakfast channels. And also in terms of products, we are launching more products with higher appealing in pricing that's appealing to the mass market. We are talking about Weizhen and -- our new soy milk product that's based on brown rice and wheat. The retail price is about CNY 2. This fits the pricing expectation of the mass market.

So in terms of channel resources and distributor resources, we are putting an emphasis on developing channels and distributors with access to the breakfast stores and also with the catering channels. So with these measures and with the new products that we have launched, we aim to target the mass market and this is what we believe to be the right move to continue to push forward in the soy milk industry.

So as I said earlier, we have recently launched several new types of soy milk, the one with the brown rice, and also oatmeal and also nuts. So with further enriched flavors and nutritional attributes, we are able to offer products that with a -- that has a more distinction on pricing and packaging to appeal to different groups of consumers.

And of course, we continue to invest in brand building. We have adopted a more multidimensional marketing strategies, including ways to strengthen the brand image, to create linkage between our products and the consumption scenarios, to use certain APPs to push messages to selected target groups, and we are continuing to sponsor certain popular TV programs. So with these measures, we are continuing to lead the soy milk market with Doubendou.

And the second category that we like to talk about is, of course, Meibeichen, our fresh brand. We launched Meibeichen in last November. So until the first half this year, Meibeichen has made a very smooth start in the market and has achieved a solid progress. All our factories now have installed the production line for Meibeichen, and our production facilities are coming online. Our production capacities are being released as we launched the products.

The product is in a ramp-up phase, but because all our products -- all of -- each of our factories can produce a full range of products, therefore, the cost of production has been spread out through all our products. Therefore, Meibeichen has a more advantageous GP margin, and this margin is improving as our sales improve, and also as we improve on our operational efficiency.

Here, we are taking Dali Group's resources to play. These resources include the following: first of all, Daliyuan is the leading brand in bakery in China. So Dali has a very in-depth knowledge about the bakery industry and also a clear roadmap about how to develop Meibeichen. And secondly, Dali Group has over 5,000 distributors in Mainland China, with access to approximately 2.5 billion -- sorry, 2.5 million point of sales. So we have a lot of resources in terms of distribution and the point of sales that we can select -- from which we can select some to carry our products. And thirdly, the name Dali Group and Daliyuan is a household name -- has become household names over the past 30 years of our operations. It's now known amongst distributors, retailers and as well as consumers. And these names provide very solid endorsement for Meibeichen. And fourthly, of course, our current logistic system can help Meibeichen to develop.

And I'd like to share some numbers, some important indicators. First of all, the number of point of sales. At this moment, we have roughly 70,000 point of sales for Meibeichen. Our year-end target is to reach 110,000. And to give you an idea of how -- what that means, the total number of retail shops that's relevant to fresh bread or short shelf-life bread in Mainland China is about 900,000. Okay. And the second indicator is the daily delivery date. At the moment, we have a 35% daily delivery rate, and by the end of this year, we hope to increase that to 50%.

Now we are not immediately pushing for a higher daily delivery rate because at this stage, we still do not have a -- the number of point of sales that's large enough with a high enough density for us to support a much higher daily delivery rate without incurring an unacceptably high distribution and logistic costs. So in other words, the daily delivery rate will improve as we increase the number of point of sales and also increase its density. It will improve over time.

The third indicator is our return ratio. We started with a 23% return ratio last November when we first launched Meibeichen. And now we have lowered that to 14%. And by the end of this year, we hope to reach 13%, 1-3, 13%, which is more or less the industry norm. And finally, the number of distributors. At this moment, we have 760 distributors, and by the end of this year, we hope to reach around 1,000 distributors that will give us sufficient coverage over the entire country.

And in terms of SKUs, we have now launched 50 SKUs in 9 series. This is a wide enough product range to cater to regional differences, or regional preferences across different parts of the country. So all in all, as a newly launched brand, we believe that Meibeichen has progressed as strong as we can expect, and we have confidence to reach our full year target, which is CNY 1 billion.

And I would like to also talk about the leisure food business, which cover Daliyuan and also Copico. Now with the revamp of the sales system coming to fruition, we are now able to upgrade our leisure food business. More specifically, in terms of product launch, we are stepping up the pace for launching new products. As our Chairman mentioned earlier in today's briefing, over the past 2 years, we did not have sufficient resources and energy to launch new products for Daliyuan, which has led to a somewhat stagnant product portfolio, but this is changing. In recent weeks, we have launched several new products. Unfortunately, I don't have the English names for them, but the -- we have pictures available on our website. And if any of you will come to China, you will find that these products are now available in most of the areas that you may visit, and we have found a welcoming market for these new products. So this means that we are injecting new life -- we are breathing new life into Daliyuan.

And the same is true for Copico. We are putting more emphasis on developing new unique flavors for Copico with an emphasis on fresh cut chips. This has a stronger appeal to our target audience, target customers. And in terms of our channel and marketing strategies, we are stepping up the penetration of Copico in modern channels, and we are also using differentiated packaging to start to penetrate the e-commerce channels. So the message here is that we are injecting new energy into some of our existing mature brands.

And lastly, I'd like to talk about the RTD drink business which refers to energy drink and our herbal tea. Our energy drink brand, Hi-Tiger, has achieved a 6.8% increase in the first half this year. This is a very good result given the fact that the market for energy drink has become highly competitive. In the past 2 years, there have been numerous new entrants into the market but Hi-Tiger remains very strong. Our market share has increased -- continue to increase and therefore, our strategy is to continue to solidify our branding advantage to further enhance consumer education about the Hi-Tiger as a government-sanctioned energy drink, and also to tailor our marketing strategies around the 2019 FIBA Basketball World Cup that is happening in China.

And for herbal tea, we're planning our resources commitment to this brand. We are stepping up its branding and marketing to build a stronger connection between the brand and the traditional Chinese culture. And hopefully, in the second half this year, sales of Heqizheng herbal tea will stop declining.

Okay. I think that's a brief introduction of what we have done in the first half. And I will be happy to take some questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question from Mr. (inaudible) from (inaudible).

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Unidentified Analyst, [2]

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This is Robert. Thank you for taking my call. Just can you talk about -- give us kind of a breakdown Meibeichen sale in the first half from the food group, and also if possible, break that down from first quarter and second quarter?

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Unidentified Company Representative, [3]

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We have the revenue of around CNY 300 million. And of course as I mentioned, that the brand has just been launched, and we are in the ramp-up phase. So sales is increasing almost 15% by each month.

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Unidentified Analyst, [4]

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Okay. So that CNY 300 million is the first half?

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Unidentified Company Representative, [5]

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Yes.

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Unidentified Analyst, [6]

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Okay. And 13% on average growth just -- and can you just break that down for first quarter and second quarter?

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Unidentified Company Representative, [7]

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No. But I think you have a pretty good idea -- you should have a pretty good idea.

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Operator [8]

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(Operator Instructions) The next question is from Henrietta Seligman at Somerset Capital.

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [9]

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It's Henrietta Seligman from Somerset Capital. I wanted to ask about the soy milk product. Can you talk about what your expectations were at the beginning of the year? And how they have changed with the first half results? And how much you're sort of revising down your guidance for the full year? And then can you talk about your expectations in the medium term for the product as well, please?

And then secondly also on soy milk, can you talk about the distribution and whether there has been any changes in the channel, any loss of distributors and how you're planning to grow?

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Unidentified Company Representative, [10]

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Okay. Well, as I said, Doubendou is the leading brand for soy milk in China. We are leading the market. So I'm sure you have heard that people begin to comment that Dali has had a follower strategy. Here, we are the leader. So as a leader, we are also the pathfinder. So obviously that comes with a cost. And at the beginning of this year, we knew that we would be exploring new territories because over the past 2 years, we have been concentrating on building the market in the top-tier and second-tier cities, mostly in the modern channels. Those are the markets you have to occupy first, to conquer first for a new brand to establish itself because they had a high ground. With those -- with a presence in the top-tier cities and in modern channels, you can build your brand image, you can educate your consumers.

But after that, the challenge will be to expand your business into the mass market. And the majority, the vast majority of the Chinese consumer resides in the lower-tier cities. They have a -- they are more price sensitive, they have different perceptions, different preferences as compared to the consumers in the top-tier cities. So as I mentioned earlier, to conquer the mass market, we need the relevant product, with the right pricing, with the right channel resources. So that's what we are doing with the launch of new product and the acquisition and the building of the breakfast channels and the catering channels to enter the mass market.

In terms of sales expectation, we knew that compared to the first 2 years, sales growth will be slow this year, and we stand by that estimate. For the full year, we expect CNY 2 billion plus in terms of revenue. In medium term or even longer term, we have a firm belief or we have faith in this industry, in the soy milk industry, and also in Doubendou. We are doing the right thing. We have identified our current challenge of bottleneck. We have also identified a way to break through. And we have plans in place to execute our new revenue strategies. We have new products, new marketing strategies, et cetera. So longer term, this will be a strong growth driver for us.

Second part of your question about distributor...

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [11]

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Could I just follow-up at this point just on that? Given that, historically, your distribution has been primarily through the traditional channel, and you have had a big mass market focus. Why is that you haven't had more success in that channel to date and that you haven't had the right product, I guess, knowing that consumer quite well through your other product?

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Unidentified Company Representative, [12]

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Well, I thought I mentioned that earlier. The way to develop a new -- to launch or to establish a new brand, we'll start with the high ground, then after that we come to the mass market. And the first 2 years was the -- was how we or when we capture the high ground. Now we are coming to the mass market. This is a very logistic flow of this exercise called brand building.

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [13]

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Okay. And then on the distributors, you were going to answer.

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Unidentified Company Representative, [14]

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Yes. I was about to talk about that. The sales system revamp are more about our internal restructuring of our sales team, so that each -- or we have -- as I mentioned, we have now a more focused team catering to different type of products and then match those products to the right channels with the right pricing and packaging, which imply that we also need to find or to service -- which enables us to service our distributors better. And so for our distributors, we haven't changed or kept an increased large number of distributors that some investors believe that we have to do. Our distributors remain more or less intact. So what we're doing is that we now have -- we can provide better service to them and help them to focus more on what they do best, the type of channels, and providing them with a better tailor-made product, with the right pricing and packaging. Earlier as I said, this is the way to help them to improve their business efficiency to help them become more successful.

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [15]

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And is there any cost implication from that entire restructuring of the sales team? Are you hiring more people to cater to a wider variety of consumer preferences?

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Unidentified Company Representative, [16]

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The short answer is no. We haven't had a large increase in personnel. And the cost comes in the necessary disruption and realignment of resources.

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [17]

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And then just a question on the short shelf-life bread. Given this sort of different logistics requirement to some of your other products, will it have it sort of a (inaudible) logistics capability? And can that product end up being as profitable at the operating line as your other product category?

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Unidentified Company Representative, [18]

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We try to integrate this business into our existing logistics as much as possible. So the answer is there's been a partial integration. In some -- in certain areas, we can use our existing logistics system. But in other areas, we found it necessary to organize our own vehicles to meet the first leg of the delivery.

But as we develop -- grow the -- grow this business, it will become easier as we also grow the distributor's team. It will become easier to integrate the business using our existing logistics. The second part of your question is about the operational breakeven, isn't that right?

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [19]

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Sorry. About the operational -- Oh, sorry, it was more about -- I mean, it's the same question essentially as to whether there is an additional logistics cost coming from that and whether the operating margin will end up being at the same level or lower than the other products as a result of that logistic...

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Unidentified Company Representative, [20]

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Well, at a normalized scenario, then we expect to have high profitability from the short shelf-life bread than from our Daliyuan product. But of course, that's on a normalized basis. This is first year of its launch.

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Operator [21]

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(Operator Instructions) Your next question is from (inaudible) Robert, (inaudible).

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Unidentified Analyst, [22]

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This is Robert again. Just a quick question on the probability of Meibeichen. When can we expect the product to be profitable on the operating side? And if next year the sales hit CNY 2 billion, what kind of a margin can we be expecting from that product?

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Unidentified Company Representative, [23]

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Well, before we talk about making a profit, we have to talk about building a sizable business first. So scale is the essential provider for making a profit, otherwise it's meaningless. So for this year, our target is CNY 1 billion. That's a sizable revenue. And if we can do that, we hope to reach breakeven or even get past the breakeven point. But what's most important for us at this stage is to build up the scale. So if we can do CNY 1 billion this year, then it can be -- we can expect to achieve CNY 2 billion next year. And at that level, we will definitely be profitable.

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Unidentified Analyst, [24]

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Okay. And then...

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Unidentified Company Representative, [25]

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How much profitable? It's too early to tell.

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Unidentified Analyst, [26]

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Understand. And in terms -- I was looking at the other bread maker -- fresh bread maker, that their biggest CapEx is building kind of a centralized kitchen. I don't know if you need to do that, like building more locations, manufacturing locations be close to the POS.

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Unidentified Company Representative, [27]

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No. No. We have decentralized facilities all over China. As I said, that's one of our main competitive advantages.

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Unidentified Analyst, [28]

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Okay. And a question on dividend policy. You issued a special dividend, 50% payout. I know when company IPO-ed, it was at 60%. Now it was down to 50%. With this special dividend -- first of all, what's the reason behind the special dividend? And the second of all, can we expect the dividend payout ratio to increase going after next year since the CapEx for the Meibeichen is behind us and also you have a lot of cash on your balance sheet?

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Unidentified Company Representative, [29]

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Well, all CapEx aside, we still have a stronger and increasing pool of net cash. So -- and given the lack of M&A targets, we think that we can afford to pay out more dividends. And so as we are committed to a regular payout of no lower than 50%, anything on top will be sort of a special dividend. This allows the company to -- some flexibility without any misleading -- any possibility of misleading the market.

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Operator [30]

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(Operator Instructions) There are no questions at the moment. I'll turn the call over back to management for closing remarks.

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Unidentified Company Representative, [31]

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Okay. Well, thank you, all, for your time. I would like to just say that the first half of this year has been difficult just like the second half last year because of macro situation and because of the system revamp that we have decided to initiate. But as I said, the -- this is a short-term pain but long-term gain scenario. And we have come through it and the positive results will start to show in the second half this year, but even more so in the coming months or -- and years. And Dali Group remains very strong. We firmly stick to the multi-brand, multi-category policy and this strategy will continue to guide us. Not only are we able to launch new products, new categories that prove to be strong, and we continue to have strong faith in these new business ventures, but we are also be able to breathe new life, new energy into existing mature categories now that we have realigned our resources allocation.

So we expect that the second half of this year will pick up our growth, and we can achieve even greater growth and greater success next year. But we're not ready to give guidance for next year. We hope that we can do so in the fourth quarter this year. So once again, thank you. And remain open -- we remain open if you have further questions. And in the next 2 or 3 weeks, we will come to -- we will do some overseas [NDRs], covering New York, Boston, London and Edinburgh. So maybe we will see you in those cities. If not, we welcome you to visit us in Mainland China any time. Okay? Thank you.

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Operator [32]

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Thank you, Mr. [Huang] and Ms. [Guo]. This concludes today's conference call. Thank you for joining us.

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Unidentified Company Representative, [33]

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Thank you. Goodbye.