CJ CheilJedang Corp

KRX:097950

Earnings Call Transcript 2023-Q2

[Seong Jun, executive]

Ladies and gentlemen, I am Seong Jun, Head of IR team and Finance Strategy. We'll now begin the Q2 2023 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, CFO and Head of Finance Strategy; Mr. Kim Jung-Ho, Head of Food Korea Business Management; Mr. [indiscernible], Head of Food Business Management; Mr. Kim Jang Young, Head of Bio Business Management; Mr. [indiscernible], Team Lead at F&C Business Management; and Mr. [ Hwang Hyun-Joo ], Head of Feed & Care Business Management. We will first have Mr. Kang, the CFO, walking us 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 Kang Kyoung Suk, CFO of CJ Cheiljedang. Today's agenda includes Q2 highlights, earnings analysis by business unit, key indicator analysis and progress on key strategy execution followed by Q3 outlook. Let's now turn to Page 5.

In Food, thanks to a positive swing in Korea Processed Food and continued growth in overseas food. Food sales grew 5% year-over-year. And market share of core products in the U.S. has continuously risen with Mandu accounting for half of total market and pizza claiming #1 position for the first time in its core brands.

In BIO and FNT, despite continued challenges, combined operating profit margin reached 8%, reaffirming their fundamental strength. For Feed & Care with improved spread in feed, operating profit margin achieved a turnaround quarter-over-quarter, with increase in profits year-over-year as well.

Next page, please. Let's now look at Q2 corporate results, excluding CJ Logistics. For sales, weak performance in BIO has been offset with growth in food led by the U.S. business, resulting in total sales of KRW 4.4233 trillion. For operating profit, despite the base effect and volatility in external environment, OP increase in food overseas and F&C narrow total decline recording KRW 235.8 billion.

With the decline in operating profit, an increase in nonoperating loss, net profit stood at KRW 69.3 billion. When including CJ Logistics, sales declined 4% quarter-over-quarter to KRW 7.2194 trillion, and OP declined 31.7% at KRW 344.5 billion.

Next to Page 8. Let's look at performance by business units. First up is Food business units. Amid persistent global uncertainties, we have focused on nurturing key products and growing channels to improve both sales volume and margin. First, sales grew 5% year-over-year. For Korea, positive performance in new products led by trends and focus on strategic products and growing channels mitigated decline in sales volume, offsetting impact from unfavorable environmental factors.

As a result, Korea sales grew 2% year-over-year to KRW 1.4218 trillion. For overseas sales, along with stronger market presence of Mandu and pizza in the U.S., GSP sales in key markets continue to grow, minimizing the impact of shrinking consumer sentiment in Asia. As a result, overseas sales grew 8% to KRW 1.3104 trillion. For operating profits, along with an all-out efforts to improve OP in Korea, profitability in overseas business rose led by the U.S., partially narrowing the decline. As a result, OP came in at KRW 142.7 billion, down 15% and year-over-year. If you look at the bar graph on the next page, OP margin in Q2 was 5.4%, excluding Schwan's PPA, and 5.2% when including the PPA.

Next is, more details on food sales in Korea. Food Korea responded to trends with reinforced product strategies and optimize channel portfolio for growth. For processed food, amidst partial recovery in off-line demand, namely in major retailers, B2B and convenience stores, we have expanded key products and new products scaling back the decline in volume with sales turning back to growth. For food ingredients or FI, amidst persisting base effect, pricing action was offset by a decline in volume, limiting sales growth.

Next, more details on overseas sales. In the U.S., thanks to increase in GSP consumer trials and stronger market presence of pizza, Americas saw robust sales, in particular, Red Baron achieved #1 market share for the first time and Mandu at Grocery has solidified market share #1 presence. As a result, sales grew 13% with quarterly sales standing at KRW 1.0368 trillion. In Asia Pacific and Europe, new territory expansion in Europe and Australia has been progressing well. but economic downturn in China and Japan led to contraction in demand. As a result, sales in the region dropped 9% year-over-year to KRW 273.6 billion. Next is BIO and FNT on Page 12. First of BIO. Compared to the previous quarter, tryptophan and specialty amino acids and Selecta led improvements, but weak market continued for global amino acids.

Consequently, bulky amino acid and Selecta's products saw year-over-year decline in sales and price. As a result, sales declined 20% year-over-year to KRW 893.6 billion. OP declined year-over-year by 76% to KRW 39.8 billion. Despite robust growth of tryptophan and specialty amino acid, margin declined due to burden from historic high base of last year.

For FNT, despite slowdown in demand recovery and delaying materialization of impact from China reopening, profit-driven operation led to enhanced margin, however, base effect from high price of nucleotide last year, and slow recovery in demand due to global economic recession pulled down sales across products in Taste & Nutrition by 26% year-over-year to KRW 153.4 billion. Operating profit declined by 17% year-over-year to KRW 44.5 billion for nucleotides and MSG profit-led operation resulted in year-over-year growth in operating profit margin, but TNR and Nutrition posted weak performance in their major markets, North America and Europe due to the ongoing recessions in those regions.

If you flip to the next page, however, share -- specialty products and sales has grown steadily to 21% as of Q2 of 2023. Next on to Feed & Care. With rebound livestock prices, F&C has continued efforts to structurally enhance profitability.

With increase in feed prices, margin has recovered, contributing to increase in operating margin. Sales is down 3% year-over-year to KRW 645.1 billion, and OP rose 159% to KRW 8.8 billion. For feed, government policy to control supply led to a fall in the number of DOCs and poultry, a rising feed price led to decline in sales volume of feed in Indonesia.

For livestock, due to shortage in supply of hogs in Vietnam, hog prices maintaining at upward trend, but due to increase in COGS, including feed price, margin declined year-over-year. In Indonesia, production cuts led by the government policy and strong demand around the national holiday pushed up DOC price, hence margin improvements.

And now on to Page 16, performance of CJ Logistics. Due to a decline in forwarding freight rates, sales and OP dropped, but has continued efforts to improve profitability. Q2 sales is down 6% year-over-year at KRW 2.9624 trillion, and OP is down 3% year-over-year at KRW 112.4 billion.

And going on to Page 19, you can see SG&A nonoperating income expenses excluding CJ Logistics. For SG&A, labor costs increased by KRW 36.94 billion, and transportation cost was down by KRW 56.9 billion. Despite a prolonged period of inflation with efficient resource allocation, SG&A to sales ratio rose only by a mere 0.4 percentage points to 22.4% year-over-year.

For nonoperating income expenses, global interest rate hike resulted in an increase of KRW 25.8 billion in net interest cost. As a result, nonoperating income and expense declined by KRW 20.6 billion year-over-year and negative KRW 129.6 billion. When including CJ Logistics, SG&A nonoperating income expenses are largely affected by CJ Cheiljedang performance, so I'll skip the details.

Next is on these key strategies and outlook. First up is key trend in the Korean Food market. For Korea Food, the year-over-year base effect is gradually wearing off. Meanwhile, continued economic recession and high inflation has made processed food a more attractive option to eating out. The reduction in CJCJ's first half sales versus the same month last year is being offset by processed food sales. As such, Korea Food sales have turned to growth in Q2, showing signs of recovery. However, raw sugar and other raw material costs are still high due to inflation, adding to the pressure. But CJCJ aims in the second half to drive sales to recover volume in full swing. In order to respond to the current business environment, we will select and focus to strengthen strategic categories and channels.

In addition, we will drive enterprise cost efficiency and absorb demand for eating in peak season and different to sub gift set. In parallel, CJCJ will continue developing differentiated new products. Examples include products launched in the first half with same taste quality as to restaurant products like Gourmet Sobaba and Detroit Pizza, both receiving great reviews by consumers. The products have driven sales up by 66% and 16% for chicken and pizza respectively, in the first half and forecasted to drive sales in the second half as well.

Next up is global food trends. In the U.S., our main product is continuously gaining market share and global strategic products with GSP are showing even growth adding to strong sales growth in the region. Red Baron brand in the grocery channel in Q2 recorded 19.9% in market share, becoming #1 for the first time. Since becoming #1 in 2021, Mandu is widening the gap against competitors, recording 49.4% in Q2, reaching almost 50% in share. As such, in 2023 first half as of the B2C channel sales, Schwan's is the frozen food manufacturer that has grown its sales the most versus 2019 before COVID. We expect growth to continue based on its market presence and brand awareness.

In China, CJCJ has sold off Jixiangju to put stronger focus on K-Foods. The proceeds will be used to improve financial status.

Jixiangju produces pickled vegetables, Zhachai, and pastes. CJCJ has sold off its shares on July 19 to Chinese Institutional investors. There are no impacts to expanding GSP sales as the business is in different categories and channels. IRR is around 20%, making it a successful investment case. Proceeds amount to approximately KRW 300 billion, which will be used to improve financial status and business operations. Also, CJCJ is expanding base of K-Food in Europe and Oceania region by expanding channel in markets already present and entering new markets. In the U.K. and Germany, Mandu and Chicken are currently sold in Costco and Itsu looking to expand markets to France and Northern European region.

Over in Oceania region, in Australia, bibigo Mandu is currently on the shelves in 1,000 Woolworth stores, the biggest local retailers since May. In July, we've obtained a local manufacturing facility for a full-blown entry to mainstream channels in not only Australia but also in New Zealand.

Let's go on to BIO, tryptophan and specialty amino acid trends. Tryptophan is growing its share in BIO sales from 12% in Q1 2021 to 17% in Q2 2023. The hog industry in China is restructuring and advancing the change led by integrated major players. As such, the low crude protein trend is spreading, improving the ratio of amino acid and formulation.

CJCJ, based on its technological edge and price competitiveness against competitors is solidifying its market leadership and preempting the increase in demand. Going forward, the hog industry in EU and South American region is expected to be good and livestock industry scaling up in China and the APAC region, continuing structural demand growth. However, compared to growing new demand, global supply will fall short, which will drive up price.

Specialty amino acid has grown from 12% in Q1 2021 to 21% in Q2 2023. Due to the spread of low crude protein trend, additional demand is surfacing based on different attributes of the raw materials across regions. Arginine is creating new demand by boasting its heat stress reduction function. Going forward, increase in use of low-cost grain to substitute soybean meal will lead to amino acid imbalance, which in turn will create demand for specialty amino acids, such as Valine and Isoleucine. Specialty amino acids will become a critical part of BIO portfolio as more emphasis is put on the different functions of amino acids such as stress relief and texture improvements.

Next is updates on sustainability. CJCJ is using sustainable packaging and ingredient sourcing to minimize environmental impact across all value chains. CJCJ has been working to reduce harmful packaging materials and cut back on unrecyclable materials.

Starting from 2019, CJCJ has not used OXO degradable additive in all plastic packaging. Starting this year, we've listed 6 materials, including PET-G in the negative list and researching on the feasibility of a gradual phaseout.

In addition to reduced greenhouse gas emission and waste from packaging, we are taking part in the European Alliance called 4-Evergreen and have set a 4-step process guideline in packaging development. Last year in the U.S., CJCJ has signed a partnership with MBOLD initiatives based in Minnesota to expand infrastructure for recycling films and supply of recycled plastic to drive down greenhouse gas emission and waste.

CJ Selecta, since declaring deforestation free in 2021, announced in April that it would no longer purchase any soybean from Amazon Rainforest starting this year, achieving their commitment 2 years ahead of schedule. The achievement was possible as more farmers outside Amazon Forest participated in the Seed Project, leading to an increase in soybean purchases outside the forest. Seed Project provides seed and financing to farmers and commits to purchasing their entire soybean harvest. CJ Selecta focuses on building a virtuous cycle in which soybeans purchased through the program can be repurposed after processing to reduce carbon emissions in the entire SPC production.

Next is on Q3 forecast. Korea Food business is expected to see impact from economic recession and high inflation, making processed food more attractive than dining out. By driving wellness business, K-Street food innovations, partnering with retail sales and expanding gift sets for Chuseok with drive sales volume recovery. In terms of margin, year-over-year base effect will continue, but cost reduction efforts via TCM project and strategic reduction of SG&A to offset for margin loss.

For our global food business, U.S. will continue to see sales volume growth, strengthened market position for Mandu and pizza and newly create Asian destination zones and major retailers to expand base for GSP sales. For China, actions will be taken for manufacturing, logistics and marketing and other value chains to boost efficiency and expand channel coverage to minimize impact from economic recession.

In Japan, bibigo products like Mandu, Chicken and P-Rice and smaller size Micho concentrate and RTD innovation will drive growth. For BIO, tryptophan and specialty amino acids will see good momentum. And with strategic sales expansion, the business will see improvements versus previous quarter. If China's economy rebounds fully, bulk amino acids like Iysine may rebound together creating a potential business upside.

For FNT, the demand for TNR and Nutrition in North America and Europe is moving slowly, but has a chance to rebound by leveraging the market position of nucleotide if demand recovers in China.

For Feed & Care, due to reduction in the number of livestock demand for feed will continue to slump but due to insufficient livestock supply, the Vietnamese hog and Indonesian chicken price momentum will continue, forecasted to maintain profitability. All in all, CJCJ will continue to see raw material cost pressures but with improving volume in Korea, continued growth of global food sales and tryptophan and specialty products and rebounding profitability of F&C due covering Vietnamese hog price. Business and profitability will continue recovering after hitting a trial in Q1.

Corporate sales growth for Q3 will decrease by mid-single digits due to continued year-over-year base effect and record OP margin of 6%. That is all we have prepared for a day. We will now begin our Q&A session. One announcement before we go on simultaneous interpretation will provided for Korean questions, but questions in English will be consecutively translated. Please speak fully for the interpreters.

[Seong Jun, executive]

[Operator Instructions]

First question is Kim Jungwook from Meritz Securities.

[Jungwook Kim, analyst]

I have 3 questions. Number one is on -- you're saying that the base effect is easing for the processed food, which is a positive sign. And starting last year, you are seeing some struggle with coupons. So do you see any plus signs in the second half? Or do you think the prolonged conflict with coupon is going to spread and give impact to the other channels?

And my second question, in the U.S., the frozen pizza became #1, which is amazing. And in the food industry, the market share switch is uncommon. And as you are the #1. The #2 player now Nestle, I believe the composition will become fierce. So how are you going to respond to that?

And after COVID, you have strength in distribution, you were able to expand sales through that. And afterwards, what will be the efforts that you've put in to boost sales even more. And last question is on specialty. BIO specialty is doing well, but the bulk of amino acid also need to grow in the same way. So what grounds do you have? Do you see that the business is going to turn around in the second half. That is all.

[Unknown Executive]

All right. For the first question regarding coupon, the deal terms with coupons and the negotiation is still underway. And the 2 companies are putting in a lot of efforts, but we have not yet come to a solution yet. And CJCJ, of course, the coupon is the #1 platform and there are a lot of opportunities in sales, and we are facing a lot of loss. But the other platforms in online business like Naver and Gmarket, and Market Kurly, there are other platforms in the market. Though we are offsetting some of the loss.

And starting in the second half, we believe Hetbahn, Mandu and our other strategic products, we will be able to make up for the loss that we have lost due to the coupon challenges starting like nearing the end of this year, we believe we'll be able to overcome the gap. And the impact to the other channels, we believe that the off-line demand is growing recently. So where in other channels, we are a bit more competitive so regardless of the challenges with coupon we're seeing strong growth. And just to add, in Q2, looking at other online channels, if you look at our B2C, CJ, the market grew by 33%. And Naver and Market Kurly, Gmarket, the other platforms, if we add them all together, we've grown 65% versus last year to make up for the loss.

All right. To the second question on the market share, for pizza in the U.S. So in -- for our Mandu business, we came #1 in 2021, and the Asian -- out of the Asian snack category in the U.S., CJCJ is the #1 player. And now Red Baron brand has become the #1 brand with 19.9% market share in the grocery channel. For pizza, of course, like a major player, like Nestle is our competitor and the competition will continue. And accordingly, CJ Schwan's, we'll monitor the economic recession and the economic conditions. And according to the retail dynamic and the shifting landscape, we will dynamically monitor and execute our pricing and volume strategy.

In 2023, first half, the B2C sales portion grew, and we became the biggest frozen food manufacturer who's grown versus 2019. So based on our market presence and brand awareness, going forward, we are going to expand our market position in Asian category and the pizza category. And we see the synergy with the CJ Food integration is going to really show up in the second half, and we will maintain our strength going forward. Right, on to the third question. So the commodity amino acid due to the pressure of the falling price and delayed in the line expansion, the -- we do see a slight hint of signs of recovery.

So CJCJ will not go into a price-led competition and our commodity manufacturing line is going to convert to specialty products -- specialty product line to continue our profitability. Now let's go on to the next question.

[Seong Jun, executive]

Next question will post by post by Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

I have 3 questions in total. Number one is on the U.S. food market. So previously, the market share for pizza has been growing. And if you look at the journey, our price point was a bit more attractive than the competitors. And we were more for the value type to drive up share. So it was a more value for money product, but you mentioned that you're going to execute a more dynamic pricing strategy. So is it a pivot to the existing strategy? Or are you maintaining the existing strategy? So I would like to hear more details on the future strategy.

And my second question is on Europe. So the distribution channel is increasing in Europe. So I believe that is very encouraging.

But on the volume that you're selling in Europe, how are you responding in terms of the manufacturing. I think you are leveraging the existing site. And are you going to leverage the existing sites in Europe? Or are you going to explore from other countries? So what is your strategy for the manufacturing in Europe?

And my last question is on FNT. For FNT, as it reopens in the market and for CJCJ, I believe you expected rebound and you are -- you have created FNT, but unlike the expectation, the Q-o-Q, Y-o-Y, you're seeing a slight slump and the momentum is slow. So how do you see the current situation? And going forward, how are you going to boost the sales and profitability for the FNT business? And what are your plans?

[Unknown Executive]

Thank you for the question. So for pizza in the U.S., as I mentioned, so the pizza market itself in the U.S. we have the premium segment and high premium and mass market. So there are different tiers in the market. So Red Baron is in comparison to the Nestle's DiGiorno products. So it's a premium segment. The Red Baron. So not only Nestle, but last year for us, we took some pricing actions. And so the timing of the pricing action and the timing for and the amount of pricing increase, if you look the pizza consumption in restaurants have fallen in last year. We see a growth in demand for the frozen pizza in retailers.

And if you look at the first half, we see a slight -- in terms of the volume sold, we see a slight slump in volume. So after taking some pricing actions last year in the first half, we mean our momentum. In the second half, the visibility, we don't know. We are uncertain whether it will be similar to -- in the first half. So in the U.S. region, we believe -- we are considering whether to focus on promotions or taking pricing action. So it's very dynamic and volatile. So we need to monitor the market closely. We are monitoring the market very closely.

And secondly, the Schwan's pizza and the reason behind it becoming #1 is because we were taking dynamic pricing strategies and actions. And in addition, we maintained DSD. We believe that was our competitive edge in the U.S. retail market. For the second question regarding the European market, so we are -- we have been continuously expanding into new territories, including the European continent. And as one pillar, we are looking in to enter -- we have entered the U.K. and the Mainland as well. And we are focusing on the [indiscernible] channel, and we have seen good growth. We sold Mandu and imported products in those channels to drive sales in the past.

And now we are listing chicken and Mandu in Costco and Itsu, so these are so-called mainstream channels. And our sales is up more than 30%. And going forward, we are driving sales with Mandu currently in the European market. So we have the manufacturing site in Germany. And by looking at the growth in our capacity, we believe starting from 2025, we will be maxing out our capacity. So we need to expand our manufacturing sites, and we are looking into considering creating a new site.

And to answer your question on FNT. Our key product is nucleotide and TNR, the natural food additives. And for nucleotide compared to our expectation of the reopening impact has delayed and we see a slump in the demand growth in China, and we see a stagnant demand from China. And the performance is a bit lower than our expectation because of that. But considering the fact that China will reach its economic target for this year and if we see the Chinese government to boost up its economic growth, we see that it's going to rebound soon in the second half. And by leveraging our market presence of our nucleotide, we believe we'll be able to rebound our market volume and profitability.

For TNR, due to global inflation and economic recession, the downstream business for our premium segment is going down and the global [ CPP ] players and the local major players -- we are creating applications and expanding partnerships.

We're preparing relevant strategies. And through -- by executing those strategies, we believe we will be able to rebound in 2025 and onwards. And within this year, we hope to gain POs in our new businesses. And one prong would be the phosphate replacement for TNR, it's high binder for TNR and the fermentation based meat flavoring, which is [ V-meat ]. So we have launched those new products. And within this year, we hope to gain some POs for those products. And for Nutrition solutions, the natural antioxidant, the active and rich boost, we have launched a new product, and we hope to see gradual increase in sales.

[Seong Jun, executive]

[Operator Instructions]

The next question is from Kim Hyeeun of Morgan Stanley.

[Kelly Kim, analyst]

I have 2 questions. So both of them are relevant to profitability of food business. So for the U.S., it's doing very well in terms of sales in the second quarter. You have told us about the operating margin before PPA. But if we compare from last year, we would like to know how the profitability is moving in the U.S.?

And my second question is right now in the first and second quarters, especially for food business in Korea, there are cost pressures and capacity pressures, and there has been some decline in profitability. So as we move into the third and fourth quarters, we would like to know how much of that cost pressure is likely to alleviate? And we would also like to know how -- I mean, what kind of areas do you see where we would be able to see more profitability drive?

[Unknown Executive]

First, on the first question. Last year, Schwan's PPA was about KRW 5 billion. And if we look at U.S. as a whole, before PPA, the OP margin was 6.3%. If you do the calculation, this quarter, it's 8.7%. So there has been improvement of about 2.4 percentage points.

And as for the Korea business and the cost pressures regarding Korea business, so we believe that there would be 2 factors. First is that there would be the rise in the commodity prices, including grain and is now climbing down even so if we think about the input cost, so we believe that our -- according to our projections, as we move into third and fourth quarters, there's going to be some improvement quarter-over-quarter. But as a whole, if you think about it, if we look at the commodity prices in grains, it's going to -- it's likely to stabilize. But if you think about raw sugar, we feel that it's going to be higher than what we have projected. So that's going to impact our input cost.

So regarding this area, of course, we will do our best to save cost and raise efficiency, but at the same time, for these cost pressures, we would have to think about maybe taking some pricing actions for our B2B customers. So that could be an example.

And another factor would be that if we look at the sales volume compared to the same period last year, it has been -- it is declining until the third quarter. And as you have seen in our trends compared to the first quarter, if you look at the second quarter, the decline of sales volume has alleviated. So as we move into third and fourth quarters in terms of sales volume, we are expecting some improvement especially led by processed food. We see -- we feel that there's going to be a clear improvement there.

[Seong Jun, executive]

The next question is from [indiscernible].

[Unknown Analyst]

I have some additional questions. So regard to -- I have one question on grain price and another on financial structure. When we think about grain prices, it had -- it's going to take some time for the grain prices to stabilize against our anticipation. So if you think about the grain price trend in the second half of the year, we would like to know CJ's outlook. And we would like to know what kind of rationale you have for projecting such direction.

At the same time, in Korea, if we think about it, in terms of taking pricing actions for both FI and processed food, there has been some impact from government regulations. I'm sure there are some hurdles there. So I'd like to know what kind of plans you have in mind to address these government regulations against potential increase in prices of products?

And my second question is, we have divested CJ Cheiljedang, and we feel that there's going to be inflow of some additional cash flow.

But considering the high interest rate environment, we feel that there's some certain increase in interest costs, so we would like to know what kind of future plans you have for financial structure improvements such as divesting noncore business. We'd like to know whether you can provide us with some guide on these areas.

[Unknown Executive]

So regarding the -- your question on grain prices. So there's a lot of difficulties surrounding projections of grain prices granted. But in the mid- to long term, other than raw sugar for corn, soybean and raw wheat, there could be some volatility, but we feel that they are likely to stabilize in the near term. I think the hot topic here is about El Nino or climate change. If we look at past experiences, when we have El Nino in full swing, Southeast Asia, India and Australia are likely to experience drought and palm oil, rice or raw sugar from these regions and some wheat even are likely to be impacted. Before wheat, we have a lot of support across the world.

So the impact may not be too visible before other commodities or is there also going to be recovery in supply in other regions by grain. And when we consider the grain inventory status for wheat, corn and soybean, we feel that in mid to long term, they're likely to average down. As for palm oil, we feel that there's some possibility that their productivity or yield may go down, but that's going to push up the price of soy bean oil. So from our business standpoint, it's going to be -- and when we think about our cooking oil business and our Selecta business, this could be a positive factor.

And as for raw sugar, there are uncertainties out there, but our projection is that right now, right now, the price at this moment is already factoring in the impact from El Nino and especially in areas like Brazil, and depending on how a supply comes out of these major suppliers, there is some possibility that the price of raw sugar may slightly dip as well. So I think that's what we can say for our grain prices projections at this point in time.

As for profitability, so internally, we are trying to streamline our cost and operation within ourselves and especially in manufacturing.

As mentioned earlier, the more sales volume we have, we have increasing utilization rate, and that's going to work favorably against our fixed cost and that's going to expand in the third to fourth quarters. And as for SG&A for one-off events, we have been continuously streamlining our efforts -- streamlining to stable on our SG&A. So through these efforts, we are trying to offset some of the burden in GP -- burden in costs through GP.

And in terms of financial structure -- your question on financial structure. In the second quarter, as of the end of second quarter, if you look at net debt, it's about KRW 6.7 trillion right now. It's about KRW 6.78 trillion want to be exact. And by the end of the year, we would like to further lower net debt to make sure we are in line with the level as of the end of last year. So we'll be looking into CapEx or other controllable costs or expenses, including working capital to make that possible.

Additionally, for efforts to improve financial structure, including potential sales of noncore business. For -- as far as we know we would be continuously looking into our portfolio and looking into their potential as well as their future. And we would be continuously looking into whether the assets we have now is critical to us or not. So of course, it's all going to depend on how these would be reviewed at the end of the day. All right. So due to time strains, we'll just take one last question.

[Seong Jun, executive]

[Operator Instructions] We have a question from Kim Jungwook of Meritz.

[Jungwook Kim, analyst]

I have 2 questions. Regarding your grain price projections regarding raw sugar, you mentioned there are concerns over potential increase. When we think about amino acid, I mean raw sugar is the main ingredient, so we'd like to know how you're going to fend off the potential -- the impact of potential increase in raw sugar. And for Cheiljedang divestiture, we feel that it's all part of your Selecta focused strategy in food business. And in the past, you've had these strategies for White Bio, Red Bio and Green Bio as your growth engines. And we would like to know what kind of Selecta focus strategies you would have in terms of your growth momentum strategy going forward?

[Unknown Executive]

Regarding concerns over a potential increase in the price of raw sugar regarding amino acid so for -- so we would be looking into alternative sugar that would be able to produce the same level of deliverables as it would have when we use raw sugar. So for strains that we use that -- where we use raw sugar, we are looking into strains where we can have the same output with glucose. We -- so that's the kind of outstanding technological gap we are trying to engage in to ensure these alternative options.

And for -- as for our new growth engine regarding White Bio and Red Bio, regarding these businesses, of course, so there are some areas where we have touched upon in the past. But if you look at -- in the second half of 2021, we've had -- we have declared the CPWS strategy. And we talked about a potential acquisition of assets outside.

So there's a lot of actions taking place. And when we think about -- for any company regarding new growth engines, it would not necessarily have to do with short-term performances. Of course, short-term performance is important, but a lot of these efforts are approached from mid- to long-term perspective. So instead of making decisions or competing conclusions right away, we would be taking step-by-step from a mid- to long-term perspective. We are seeing some visible results.

As for microbiome and Red Bio, last year, we've had the CJRB-101 as part of our pipeline. We have received approval for clinical trials in Korea and the U.S. And in the U.K., we've also acquired assets from a company called 4D Pharma. So we are taking a long-term approach. And it's the same for other businesses as well. So when there are visible progresses, we will make sure to update you accordingly.

[Seong Jun, executive]

All right. Without further questions, we will conclude today's call. Thank you, everyone, for your participation.

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