CJ CheilJedang Corp

KRX:097950

Earnings Call Transcript 2024-Q1

[Seong Jun, executive]

Ladies and gentlemen, I am Jun Seong, Head of IR Team and Corporate Finance. We will now begin the Q1 2024 business results report for CJ Cheiljedang. Today's session will be interpreted simultaneously into English for foreign investors.

Let me first introduce the CJ team. We have Mr. Kang Kyoung Suk, Head of Corporate Finance; Mr. [indiscernible], Head of Food Korea Business Management; Mr. [indiscernible], Head of Food Business Management; Ms. Kim Jang Young, Head of BIO Business Management; and Mr. Hwang Hyun Joo, Head of Feed & Care Business Management. Mr. Kang will first walk you through the business results, followed by progress on key strategy execution and outlook by respective presenters. We will then move on to Q&A.

[Kyoung Suk Kang, executive]

Ladies and gentlemen, I am Kyoung Suk Kang, Head of Corporate Finance. Today's agenda includes Q1 highlights, earnings analysis by business unit, key indicator analysis and progress on key strategic execution, followed by outlook. Let's flip to Page 5.

First, as the Lunar New Year giftset sales is reflected to the full quarter performance in Korea, growth continues in the U.S., and the high-margin products are growing and expanding in BIO, Q1 sales rose by 1%; OP, 78%. In Food Korea, processed food led sales growth by 4%, mainly thanks to the difference in the timing of reflecting Lunar New Year giftset performance, consumers shift towards at-home dining, recovery in online channels and new products based on emerging trends. U.S. saw growth in core products like pizza, Mandu and Frozen Readymeal and key channels such as B2C and K-12.

Europe expanded into mainstream in key markets and entered new countries. Mandu sales stayed high in Australia. Likewise, the overseas food business recorded high growth in new markets. As for BIO, high-margin products such as tryptophan, specialty amino acids and TasteNrich contributed to margin mix improvements, resulting in OP growth.

Moving on to the next page. Let's now look at Q1 corporate results, excluding CJ Logistics. For sales, growth of food in Korea and U.S. and high-margin product expansion in BIO resulted in KRW 4.4442 trillion. OP stood at KRW 267 billion, thanks to the different dates of Lunar New Year in Food, Korea and growth in U.S. and expansion of high-margin products in BIO. Net profit increased, thanks to OP recording KRW 100.8 billion. Including CJ Logistics, sales went up by 2% to KRW 7.216 trillion, and OP increased by 48.7% to KRW 375.9 billion in Q1. Next, let's look at performance by business units.

It's Page 8. First up, Food. In Food, sales volume increased of core products in Korea and the U.S., and streamlined SG&A contributed to profitability improvement. Sales increased by 3% year-over-year. Despite Jixiangju's divestiture, sales improved, thanks to the base effects arising from the different dates of Lunar New Year, volume growth of core products like Hetbahn and Mandu and holiday products, and market leadership of bibigo and Red Baron's in the U.S. Mandu and pizza market.

As for OP, thanks to the full quarter sales of Lunar New Year giftsets in Korea, which boosted profitability, sales growth led by processed food, sales growth of high-margin products in the U.S. and efficient resource allocation, we recorded KRW 184.5 billion year-over-year growth of 38%.

Next, Page 9. Next is more details on food sales in Korea. Food Korea recorded KRW 1.4563 trillion, up by 4% year-over-year. Processed food growth was propped up by core products like Mandu, Frozen Readymeal, Hetbahn and Processed Meat. For Food Ingredients, sales decreased due to the base effect from last year's ASP hike and focus on profit margin of key products, but volume decline has been eased.

Overseas sales of Foods reached KRW 1.3752 trillion, up by 2% year-over-year. In the U.S., despite the high base of last year, the sales volume of core products led the overall growth. U.S. showed robust growth in key channels such as B2C and K-12.

The divestiture of Jixiangju in China and profit-focused operation in China and Japan impacted the overseas performance. But Europe boosted sales in mainstream channel of key markets and entered new countries and Australia continued growing, thanks to high bibigo sales in Woolworths that we entered in 2023.

If you go on to the next page, OP margin in Q1 was 6.8%, excluding Schwan's PPA and 6.5%, including the PPA.

Next is BIO. High-margin products such as tryptophan and specialty amino acids maintained high growth, offsetting the slowdown of bulky amino acids. As the sales of TasteNrich reach and Specialty products in Taste & Nutrition recovered, the sales grew by 3% year-over-year. OP was KRW 97.8 billion, 55% up year-over-year. OP margin improved as the profit fluctuation of bulky amino acids stabilized and the product mix improved, thanks to the increased share of high-margin tryptophan and specialty products. As you can see in the next page, the share of specialty products continues growing, account for 22% as of Q1 2024.

Page 13. For F&C, sales declined due to the decrease of feed and livestock sales volume, but the deficit shrank, thanks to higher livestock prices and stable COGS. Sales dropped 10% year-over-year to KRW 591.1 billion. OP recorded minus KRW 15.2 billion. As for feed, due to lower demand, exit from low-margin accounts for business structure improvements and scale down of farming in Indonesia and Vietnam, the volume and sales declined.

As for livestock, the deficit was eased, thanks to poor price hike from shrinking supply and cost stabilization in Vietnam. In Indonesia, productivity stabilized and DOC farming increased as Lebaran is nearing. Hence, higher livestock price and profitability.

On Page 15, performance of CJ Logistics. The number of new orders increased, leading to growth of cargo volume and sales. Profit grew, thanks to tax-driven business structure. Sales in Q1 rose 4% year-over-year to KRW 2.9214 trillion and OP grew 11% year-over-year to KRW 109.4 billion.

On Page 18, you can see SG&A and nonoperating income and expenses, excluding CJ Logistics. For SG&A, even though commissions increased, but thanks to the management, our SG&A to sales ratio improved by 0.1 percentage point year-over-year. Nonoperating expenses stood at minus KRW 133.9 billion, KRW 16 billion down year-over-year.

Next is Page 19. When including CJ Logistics, SG&A and nonoperating income and expenses are largely affected by CJCJ's performance, so I'll skip the details.

Next, this update on key strategies and outlook. First up is Korean Food business update. Despite the continued sluggish consumption trend, CJCJ is focusing on new product expansion for processed foods and strategic channel growth by leveraging the growing eating at home trend. According to National Statistics Office, inflation for processed food started to slow down from the second half of last year. From the first quarter this year, inflation rate for dining out surpassed that of packaged food and beverage inflation, making at-home consumption more price competitive.

It was until first half of last year when sales volume for general products, excluding giftsets, was decreasing year-over-year, but year-on-year sales started to grow from the second half. Despite sluggish consumer confidence, CJCJ strives to continue the momentum for volume growth by nurturing new differentiated products and categories, such as Sobaba Chicken and PlanTable, by leveraging the tailwind of growing at-home food consumption while focusing on strategic expansion of online channels.

Let's go on to overseas food business updates. Sales in the U.S. continued to grow based on #1 market share position. Our global strategic products, or GSP, show solid growth, and our products deliver high growth in new markets such as Europe and Australia. For example, bibigo and Red Baron pizza continued to consolidate their #1 position at the grocery channel. And thanks to our GSP scale-up strategy, GSP such as Mandu, Chicken, Frozen Readymeal and P-Rice continued to deliver high growth in the global market. In addition, CJCJ's expanding territory and new markets delivering 45% growth in Europe, including mainstream channel for key markets, entering new markets in Northern and Southern Europe. In Australia, sales is up by 70%, led by solid growth at Woolworths, which is #1 retailer for mainstream channels.

Next is update on sustainability initiatives. CJCJ is actively contributing for sustainable consumption trend by expanding PHA applications. Earlier this year, CJCJ collaborated with CVS brand CU to launch 2 cup noodle products by applying PHA coating technology for packaging. This technology combines PHA and PLA, which is durable and suitable for heating.

In addition, CJCJ developed vinyl packaging material for shipping using PHA. This new material is made of PHA without using PVC, which has similar material property of vinyl, and this is biodegradable. This material is now used at CJ Cheiljedang's 2 micro fulfillment centers for same-day delivery service and consider to be used for shipping in other regions as well.

In addition, CJCJ continues its efforts for sustainable business by building a virtuous cycle of resources. For example, we produce ISCC PLUS-certified soybean oil, which is the very first food material in Korea to receive such certificate. This soybean oil with ISCC PLUS certificate is expected to replace petrochemical materials and contribute to carbon reduction by valuing sustainability throughout the entire product cycle.

Moreover, CJCJ recently signed an MOU with HD Hyundai Chemical to build a virtuous cycle for BIO business. While HD Hyundai Chemical produces eco-friendly plastic by using soybean oil and waste cooking oil produced by CJCJ, CJCJ apply such plastic for product container or packaging materials.

Next is on Korea Food business outlook for second quarter of 2024. For Korean Food business, CJCJ strives to expand sales of processed foods by leveraging at-home consumption trend despite protracted sluggish consumption, expanding online platforms and developing new differentiated products such as Sobaba Chicken. Even though sales for FI continued to decline, the range of decline is forecasted to be smaller. Being said that, CJCJ is focused on optimized operational price and volume.

Next is overseas food business update. Thanks to our strong market presence in the U.S., sales will increase, including Mandu and pizza, along with GSP category expansions. Not only that, we forecast stronger performance by cost savings and SG&A management. Europe and Australia, we forecast growth as we enter more mainstream channels and new markets.

Despite the burden for Chinese business due to base effect caused by Jixiangju divestiture, we forecast P&L improvement by restructuring the business, including product portfolio and channel strategy.

Next is BIO. The spread between soybean cake and corn is unfavorable for CJCJ, coupled with the base effect caused by Selecta divestiture, sales growth of tryptophan and arginine is forecasted to offset such decline and make profits.

Feed & Care. Pork-raising market is forecasted to rebound in Vietnam, making stock raising costs fall. Thanks to our continuous efforts to improve business structure in Indonesia, profit for F&C will grow compared against the previous quarter. All in all, despite constraints on corporate sales growth in second quarter, core products will grow when we exclude the base effect caused by the divestiture of subsidiaries. Corporate sales will be flat versus last year and OP margin will be 5% to 6%.

That was all we have prepared for today. We will now begin our Q&A session.

One announcement before we go on. Simultaneous interpretation will be provided for Korean questions, but questions in English will be consecutively translated. Please speak slowly and clear for the interpreters.

[Operator]

[Operator Instructions] The first question is coming from Kim Jung Wook from Meritz Securities.

[Jungwook Kim, analyst]

First question is about the processed food. In Q1, the volume declined. So I am referring to the chart that you provided. So Y-o-Y, we are seeing growth in the plan. So what is your goal for Q2 about the processed food volume growth?

And next is overseas. In overseas, we are seeing 9% growth, but pizza, Mandu and the core products, they are showing steady growth. And I'm curious about the contribution of the other categories aside from the core categories. And what is your plan on the U.S. growth strategy? Please elaborate on that.

And in addition, the last question is about BIO. In Q1 or H1, the -- please elaborate on the product mix of tryptophan and specialty amino acids.

[Kyoung Suk Kang, executive]

Let me answer your question about the processed food Korea first. As you said, considering the base effect from last year. In Q2 2024, we are expecting volume growth of mid-single digits. Still, we have the advantageous price in terms of at-home dining compared to the dining out. And also, we have new products and our key brands, and we have the strategic promotions ready. And if all are executed successfully, then we are going to achieve the mid-single-digit growth.

And for the second question, in the overseas food and in the U.S., yes, we have seen steady growth in Q1. But in general, in the U.S., it is going to be impacted by the raw material price reduction, so the competition is getting fiercer. So the competitors have room for promotions, and CJCJ has efficiently defended our market share. In case of pizza, despite the base effect from last year, the pizza grew, and we are still maintaining the market leadership.

Next was Mandu. Because of the social media and the viral promotions, we are seeing double-digit expansion of sales and sales is also staying steady. Aside from Mandu and pizza, especially the processed fries and Frozen Readymeal, they are growing rapidly in club channels.

And out of our GSP, in case of Gim and chicken. In case of Gim, from Q2, we are going to start distribution in private label in a specific club channel. So I believe that we can start on a good note in Q2. And for chicken, from Q3, we are going to distribute to the main club channel in the U.S. Then aside from Mandu and pizza, we are going to see steady growth of other categories as well.

Let me answer your question about BIO. For bulky amino acids, the expected expansion of the competitor's line expansion was delayed. And also, we are seeing supply reduction of the competitors, so the market is going up and down. So it's fluctuating. So it's flat. However, the spot purchasing prices are going to rebound. So that's the signal that we are getting. And for specialty amino acids, the livestock companies in China are scaling up and they are vertically integrating. So the overall demand is going up.

And in case of tryptophan, because the global market is improving, so the high prices are going to be maintained. But in the second half, the competitors' supply are going to go up and the new suppliers are going to enter the market. So the spot purchasing price like Q1 is not going to stay the same in the second half. So yes, we are going to stay competitive in the market, considering the competition.

And you mentioned about the ocean freight cost. Well, if you look at the Shanghai index, then it's about 2,300. So it's going up continuously. So the supply disruption from the Middle East risk is expected. And also the domestic investment is going up. So the ocean freight cost is also going up. But the competitors in China and other countries, they are feeling a lot of burden in terms of the cost.

Over the past 2 months, the Europe-bound ocean freight costs went up by 30% to 40%. And our key area, which is the U.S. and the Latin America, the ocean freight cost has gone up by 100%. So we are advantageous, and we are going to stay advantageous for the near term.

[Operator]

Next is Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

This is Park Sang-Jun from Kiwoom Securities. So first is about cost. And when we think about raw material price, we see that there is a downward trend. So first quarter, do you expect it is already reflected to your plan? And after Q2, is there any wiggle room for more declines? So we are asking for your forecast about cost trend.

And second is about profits for food business. So in Korea, processed food business, except for countries -- countries except for U.S., we expect the margin will be quite high. But excluding U.S., when we look at sales growth trends, still there is room for improvement for profit. So for example, a country like Australia, while you are preparing sales expansion, are you investing resources? Or is there any reason for declining sales of food ingredient? So could you elaborate on the margin changes of food business of countries other than the U.S.?

And last part is about BIO business. So specialty products, you said shares is increasing. So this year, in terms of sales volume, CJCJ has any plan to increase a certain item. Could you name the specific item? And what kind of specification and attribute that products can offer as a growth driver?

[Kyoung Suk Kang, executive]

So first, it's about raw material for food business. For Korea, so grain price starts to decrease. But still, when we consider exchange rates, high exchange rate per dollar to won still, it gives burden for our cost. And due to geographic issues, still there are many issues that can cause some fluctuations of the price.

And same is true for raw sugar. So it is burdensome for our business. And including our processed pork fees still is increasing and international oil prices goes up. Same is true for utility price. So it gives a lot of burden for our commodity purchasing fees. And under such circumstances, we need to think about productivity improvement and bring about efficiency for our purchasing. So we are going to make efforts for more cost optimization.

And next question was about profits for overseas business, except for the U.S. So we are focusing on global territory expansion, and we are putting resources. But still, we always take profitability as our priority. So we are going to put a lot of focus on maintaining good profits. For example, when we look at other countries' profits, except for the U.S., it includes Jixiangju's divestitures. So when you exclude those numbers, I will give you a more clear picture.

So last question was about large -- bulky amino acid. While increasing the share for specialty amino acid, we will maintain such strategy. And background and context behind this is that soybean cake prices goes up. And as we use different kinds of grain, so we can improve formulation for special amino acid.

For example, we can offer functional parts such as heat resistance. So we can increase our foundation for specialty amino acid delivering double-digit every year. And one of our key product is arginine. So it is a growth driver for our BIO business. And for bulky amino acid, we can improve maintenance for our facility and production equipment so that we can also produce specialty amino acid using this kind of production facilities so that we can improve our cost on a fundamental basis.

[Operator]

[Operator Instructions] Next question is from Hanwa Securities, Han Yu-Jung.

[Yu-jung Han, analyst]

I have 3 questions. First is if you look at the Q1 Readymeal business, you have Mandu, Frozen Readymeal, Hetbahn and other categories, I see setback in the sales. So what are the categories that saw reduction in sales?

And the second question, we are seeing the sales drop. So what is the cause and what strategy? And thirdly, please update me on the Selecta progress and what is going on with the F&C as well. So please share the progress updates.

[Kyoung Suk Kang, executive]

Let me answer your first question. Well, in Readymeal, actually, Mandu is not included in the Readymeal category. Our ready meal categories are soups and stew. And yes, it is showing low single-digit growth in Q1.

And for the Japan sales, it has been focusing on the profit, especially in Q1. Because of the low yen exchange rate, our sales dropped by 7%. But from now on, we are going to normalize the prices. So after we are hitting low risk points in the Q1 and then we are going to rebound.

Next is Selecta. About deal closing, let me give you update on that. Well, the deal closing timing is depending on the approval and the merger filing completion in different countries. Because we have to conduct this merger filing in multiple countries, we have to prepare for the deliberation in many countries and all the deliberation timing is different by country. So it is really difficult to exactly tell you about the deal closing timing. So if all the timelines are visible, then we are going to tell you about that.

And lastly, about F&C. Well, about the request for the public disclosure, we are reviewing various directions of strategy, but nothing is set in stone. So we are going to tell you officially if when we do the public disclosure later.

[Operator]

Next question is from Kim Jung Wook from Meritz Securities.

[Jungwook Kim, analyst]

So for processed food, so we are seeing a lot of growth for overseas countries. So could you elaborate what are growth drivers behind this growth? And next is about feed. We are seeing improvements still, it is negative in terms of sales. So for example, we can see some improvement in Vietnam and Indonesia in the first quarter. So after second quarter, is there any room for reducing negative margins? And next is about labor cost and promotion costs. I can see the decline for those 2 items. So those are one-off decrease? Or is there a continuous impact?

[Kyoung Suk Kang, executive]

Yes. For Europe business, we have been doing the business well. Same is true for last year. So for Europe, there are mainland Europe and U.K. market, including Britain. So those are 2 separate markets for our Europe business. So we are expanding our business. For example, in the U.K., we did some MBM for Costco, and it turned out to be very successful. And for Mainland Europe, we've used to focus on Germany in the past. But today, we are expanding to Northern Europe. It will be very good for us to share details, but those are very highly sensitive strategies. So I will close by here.

So next question was about SG&A cost. Yes. Let me answer Feed & Care question first. So there are 2 parts for animal feed. So grain price will go down starting from the second quarter. So spread will become more favorable compared against previous quarter. And for animal feed, animal raising, as supply decline in Vietnam, our supply trend is getting better. And as grain price will become more stabilized, our costs will go down as well. So compared against previous quarter, we forecast there will be improvements.

Next question was about SG&A management. So you mentioned our labor cost decrease. And the context behind this is that we made a lot of efforts to streamline our labor force. And for Jixiangju, as we divestitute, it impacted good for labor cost reduction. And there are more factors behind this.

So fees increase. For example, for Schwan's, there are some increase for storage costs, and it impacted the cost and transportation cost also rise. And as you know, because of Red Sea risk earlier this year, it made ocean freight much more expensive. And for promotion costs, it's increased slightly.

So for future forecasts, we could say -- so those trends seem to be maintained for a while. And for conversion costs, for bibigo renewal projects, we are doing that project globally last year. So those costs can go up, but we will be very strict on cost management so that we can maintain the sound level of SG&A costs.

Due to time constraint, we will take last question. Thank you.

[Operator]

The last question, from NH Securities, Joo Younghoo.

[Younghoo Joo, analyst]

I'm Joo Younghoo from NH Securities. I have some brief questions. Because of -- you're seeing a lot of issues regarding exchange rates. So I would like to see how you look at the market based on the exchange rate and your response about that. And the second question is about net debt. So I can see some resources increasing about net debt response. So what's your outlook and response about that?

[Kyoung Suk Kang, executive]

Let me answer your first question. Well, yes, the exchange rate is quite high as of now, but we have a very conservative AOP. So compared to our plan, the exchange rate is a little bit higher compared to our AOP exchange rate. And in the past, in food base because of the raw materials and grain or whenever the exchange rate goes up, that we were negatively impacted by such changes, but we have BIO business and our U.S. business and we are seeing good results in the U.S. business. So they are positively impacting our performance.

So we are more neutral to the -- less sensitive to the exchange rate compared to the past. And in order to respond to such changes in the exchange rate, based on our sales, we are setting up a lot of strategies to hedge our gains risks arising from exchange rates. So we are doing our best to do so.

And for the second question about net debt. As of Q1 2024, our net debt is KRW 6.27 trillion, and compared to last year is about KRW 0.5 trillion increase. It's excluding CJ Logistics and Selecta. The net debt increased because of the foreign exchange rate hike, and that is why our -- the liabilities in foreign currency valuation increased. And in -- because the ocean freight costs are increasing recently, so by different sites, we have the safety stock ready in different regions to respond and prepare for the supply chain disruption. But as time goes by, we are going to see a reduction in the net debt as of end of this year.

This is it for the Q&A session, and this -- let me wrap up the CJ Cheiljedang's earnings call. Thank you for joining us today.

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