CJ CheilJedang Corp

KRX:097950

Earnings Call Analysis

CJ Cheiljedang Q2 2024: Steady growth despite market challenges

In Q2 2024, CJ Cheiljedang reported a slight sales increase of 0.3% to KRW 7.24 trillion, with operating profit rising by 11.3% to KRW 383.6 billion. While food sales in Korea dipped by 1%, growth in the U.S. and Europe, particularly in high-margin bio products, helped bolster overall performance. The company anticipates low single-digit growth in sales and operating profit of 6-7% in Q3. Key strategies include promoting online channels and leveraging events like the Paris Olympics for brand awareness. However, challenges remain in the Korean market due to decreasing consumer spending.

Quarterly Performance Overview

In the second quarter of 2024, CJ Cheiljedang reported a consolidated revenue of KRW 7.238 trillion, reflecting a modest increase of 0.3% year-over-year. The operating profit (OP) improved significantly, rising by 11.3% to KRW 383.6 billion. Excluding CJ Logistics, sales stood at KRW 4.3214 trillion with an operating profit of KRW 269 billion. This performance highlighted a 14% growth in operating profit year-over-year due to successful strategies in the U.S. food business and high-margin products in the Bio sector.

Growth Across Business Units

In the food business, particularly in the U.S., CJ Cheiljedang solidified its top position through the successful sales of bibigo Mandu and Red Baron pizzas, which maintained market leadership. The processed food segment in Korea also saw a 3% increase, despite an overall domestic spending decline. However, sales fell by 1% in the overall food category primarily due to low demand for cooking oil and a slowdown in the China and Japan markets. The Bio segment experienced growth driven by higher sales of premium products like Tryptophan, contributing KRW 99 billion to operating profit, up 17% from the previous year.

Regional Performance and Sales Strategies

Sales in the U.S. reached KRW 1.3244 trillion, a growth of 1% year-over-year. Notably, the company is experiencing balanced growth across various sales channels including B2C and K-12 education markets. In Europe and Oceania, increased sales of high-margin products and the brand's expansion into mainstream channels have strengthened their market presence. With the successful promotion of K-Food through events like the Paris Olympic Games, CJ Cheiljedang has bolstered its global visibility. The company plans to expand its presence in Europe by leveraging diversifying market channels, aiming for further sales increases in the upcoming quarters.

Outlook and Strategic Focus

Looking ahead to Q3 2024, CJ Cheiljedang anticipates a continuation of slight revenue growth, expecting low single-digit sales growth and operating profits of 6% to 7%. To combat the expected consumption slowdown in Korea, the company intends to optimize pricing and volume operations while effectively promoting seasonal products, such as gift sets for the Chuseok holiday. Furthermore, CJ Cheiljedang is committed to enhancing its Bio and Feed & Care sectors by focusing on product competitiveness to recover sales volume, especially in livestock products by stabilizing costs and ensuring better stock breeding practices.

Brand and Market Adaptations

CJ Cheiljedang is adapting to consumer trends by aligning product offerings to meet changing preferences, especially as consumers exhibit a shift towards at-home cooking. The company’s strategy includes promoting healthier, whole-ingredient products and enhancing the convenience of their HMR (home meal replacement) options. Despite competitive pressures, the brand is expected to leverage its strong market position to recover and grow amid fluctuations in consumer demand, particularly emphasizing sustained interest in its K-Food offerings.

Earnings Call Transcript 2024-Q2

[Seong Jun, executive]

Ladies and gentlemen, I am an Seong Jun, Head of IR team at Corporate Finance. We will now begin the Q2 2024 business results report of 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. Mr. Kim Jung-Ho, Head of Food Korea Business Planning; Mr. [indiscernible], Head of Food Business Management; Mr. Kim Jang Young, Head of Bio business Management; and Mr. [indiscernible], Head of Feed & Care Business Planning.

Mr. Kyoung will first walk you through the business results, followed by progress on key strategic 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 Kan, Head of Corporate Finance 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 outlook.

Let's flip to Page 5. First, growth of food business continued in the U.S., the sales of high-margin products increased in Bio and the margin improved in Feed & Care, hence, the OP growth at 14% in Q2 2024. In Food Korea, despite the domestic spending on the decline, processed food sales grew by 3%, thanks to product competitiveness and sophisticated sales and channel strategies.

U.S. solidified its #1 position in the market with the strong growth of Mandu and Pizza and showed a balanced growth across channels, including B2C and K-12.

GSP sales accelerated in the mainstream of Europe and Mandu sales went up in Australia, propping up the high growth of Europe and Oceania. As for bio high-margin products such as tryptophan, Specialty amino acids and TasteNrich continued growth. Feed & Care, thanks to livestock price normalization, productivity enhancements and structural improvement of the Feed business turned into surplus from Q1 to Q2.

Moving on to the next page. Let's now look at Q2 corporate results, excluding CJ Logistics. As for sales, the sales setback in food ingredients and Feed & Care was partially offset by the growth of U.S. and Europe in food and the high-margin products in Bio, resulting in KRW 4.3214 trillion. OP stood at KRW 269 billion, thanks to the sales increase of U.S. in food and high-margin products in Bio and the margin improvement in Feed & Care. Net profit increased, thanks to OP recording KRW 110.5 billion.

Including CJ Logistics, sales went up by 0.3% to KRW 7.2386 trillion and OP increased by 11.3% to KRW 383.6 billion in Q2.

Next to Page 8. Let's look at performance by business unit. First off, Food. In Food, sales decreased by 1% year-over-year. Even though the FI sales, including cooking oil declined due to profit-focused operations and the China and Japan businesses slowed down, the sales of processed food in Korea went up, bibigo Mandu·and Red Baron pizzas in U.S. maintained the market leadership, and Europe and Oceania recorded high growth, resulting in the similar sales with last year.

OP dropped by 5% year-over-year to KRW 135.9 billion. The base effect from last year due to Jixiangju divestiture and the reduced consumer spending in Korea affected the business, but the global profit growth in U.S. and Europe offset the OP decline.

Moving on to the next page. Next is more details on food sales in Korea. Korea recorded KRW 1.3807 trillion, down by 3% year-over-year. Processed food growth was boosted by core products like Hetbahn, Mandu, DASIDA and Frozen Rice. However, food ingredient sales partially dropped due to setback in cooking oil following market change and profit-focused business operations.

Overseas sales of food reached KRW 1.3244 trillion, up by 1% 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.

In other business areas, the divestiture of Jixiangju in China and business structure transformation put downward pressure to the sales of China and Japan. However, Europe boosted GSP sales and expanded in the mainstream channel in the U.K. and Netherlands and Australia achieved high growth by listing Mandu in Woolworths, the biggest retail in the country and accelerating entry into new channels.

If you go to the next page, OP margin in Q2 was 5.4%, excluding Schwan's PPA, and 5% including the PPA.

Moving on to Page 11. Next is Bio. The sales of high-margin products such as Tryptophan, specialty amino acids and TasteNrich increased, offsetting the slowdown of bulky amino acids. The sales grew by 1% year-over-year. OP was KRW 99 billion, 17% 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, accounting for 22% as of Q2 2024.

Moving on to the Page 13. Next on to Feed & Care. For F&C, sales declined due to the decrease of feed and livestock sales volume, but OP went up, thanks to the rebound of livestock prices and productivity in Southeastern Asia. The sales was down by 12% year-over-year at KRW 569.9 billion. OP recorded KRW 34.1 billion back to black from Red in Q1.

As for Feed, the market contraction affected by the scale down of farming in Indonesia and Vietnam and the profit-focused operation for business structure improvement drove down the sales. For livestock in Vietnam, amid the purpose is staying stable, thanks to the supply improvement, thanks to the productivity improvement and COGM reduction, profit increased. In Indonesia, livestock prices went up due to supply setback, broiler production sites were optimized and COGM was streamlined, leading to profitability improvement.

Moving on to the Page 15. Performance of CJ Logistics. Both the sales and OP grew thanks to the increasing volume of a global e-commerce platform and forwarding sales, productivity improvements and operational structure enhancements.

Sales in Q2 rose 3% year-over-year to KRW 3.059 trillion, and OP grew 12% year-over-year to KRW 125.4 billion.

On Page 18, you can see SG&A and nonoperating income and expenses, excluding CJ Logistics. For SG&A, labor costs declined by KRW 10.3 billion and transportation costs went up by KRW 12.1 billion. SG&A to sales ratio went up by 1.1 percentage points year-over-year, affected by bibigo brand renewal. Nonoperating expenses stood at minus KRW 126.2 billion, similar to that of last year.

Next is Page 19. I will skip the details about the SG&A and nonoperating income and expenses when including CJ Logistics.

Next, let me provide an update on the progress of key strategies and outlook. First, key performance from global food markets. In the U.S., bibigo/Mandu and Red Baron Pizza are solidifying their #1 position, widening the gap with the #2 player.

Notably, thanks to Red Baron's strong performance, the total market share of our pizza reached 26.5%, closing the gap with the #1 player by 5 percentage points. In Europe, our expansion into ethnic and mainstream channels drove significant growth. Last year, we achieved a 40% increase in sales year-on-year with 45% in Q1 and 57% in Q2.

We also leveraged the Paris Olympic Games for a range of marketing activities, successfully expanding the reach of K-Food. During the Olympic Games, we operated bibigo zone within Korea House to showcase K-Food, such as tteokbokki, mandu, rice balls and corn dog. Also, shelf from our Cuisine K project, which identifies and supports promising young Korean chefs to promote K-Food globally, prepared dishes at the opening ceremony of Korea House. They featured dishes based on bibigo products such as glazed chicken bites and grilled short rib patties, which received very positive feedback from guests.

We also conducted digital marketing activities, including virtual out-of-home ads and surprise indeputations using RC cars and QR codes to enhance the awareness of K-Food and bibigo.

Let me move on to Bio business unit to cover the trends and outlook for bulky amino acid and TNR. In Bio for bulky amino acid like lysine, the spread between soybean meal and corn recovered in Q2 and is expected to be upward flat, suggesting a favorable environment ahead. Also, if ocean freight costs remain high, our diverse manufacturing bases across regions will give us a competitive edge.

With these favorable environments and strategic sales initiatives, especially through differentiated formats like liquid, we anticipate improved performance. As for our premium flavor ingredient TasteNrich, sales have rebounded from the low point in Q1 2023 and are getting close to the levels seen in 2022 before the decline began.

Major flavor houses and alternative meat players are experiencing a recovery in demand. Accordingly, we expect sales to increase driven by new customers and emerging demand for seasoning among other things. Moving on to the progress of our sustainability efforts.

CJ Cheiljedang is contributing to a sustainable virtuous cycle by upcycling our key products. First, we have implemented an upcycling system to promote recyclability of Hetbahn containers. When consumers separate Hetbahn containers for this puzzle, local self-efficiency centers equipped with washing infrastructure collect, wash and deliver them to processing companies. Processing companies then Transport the containers into final upcycled products.

Also used Hetbahn containers are repurposed into ingredients for up-cycle daily supplies and fashion items with more examples being added. In April, CJ Cheiljedang and Kakao Makers launched a project to new -- add new value to Hetbahn containers. And recently, in collaboration with LOWLIT COLLECTIVE, a company specializing in recycled daily supplies, we produced flower pots for gardening from Hetbahn containers. We also partnered with PLEATSMAMA, a fashion company that uses sustainable materials to create a keyring featuring a Line Friends character. Through these projects, we are enhancing the consumer awareness of up-cycling and increase its accessibility.

Moving now through the outlook for Q3 2024. As for Food in Korea, consumption slowdown is expected to continue affecting us, but we aim to mitigate the impact by effectively promoting gift sets for Chuseok holiday, optimizing pricing and volume operations and expanding online channels.

As for FI, we will optimize profitability of processed soybean while increasing sales volume through profitable and differentiated products. Globally, in the U.S., we expect to strengthen market share of pizza based on our competitiveness and leverage bibigo brand and its awareness to expand GSP categories to boost performance.

In Europe and Australia, we plan to expand channels from ethnic to mainstream and especially by using the Paris Olympic Games, we aim to increase the brand awareness and enter new channels in Oceania. We are going to driving continuous growth. In China and Japan, we plan to organize -- reorganized product offerings, channels and structure through a selective focused approach to stabilize sales and improve profitability.

As for Bio, future funds is expected to slow compared to the first half, but we anticipate improving profitability in Europe and America by leveraging the recovery of the lysine market. We also expect to boost profits by recovering TnR demand and venturing into new markets. As for Feed & Care, by enhancing product competitiveness and conducting tech marketing, we are recovering feed sales volume.

With stock breeding, prices stabilizing, we expect to maintain the surplus by securing COGM competitiveness through better stock breeding, productivity and operational optimization. All in all, as for Q3 2024, we anticipate low single-digit growth in sales and 6% to 7% of OP. That concludes today's presentation. We will now move on to the Q&A session.

[Seong Jun, executive]

In the Q&A session, Korean questions will be interpreted simultaneously, while English questions will be interpreted consecutively. For smooth interpretation, please speak at a modest pace. Let us begin Q&A. [Operator Instructions]

The first question is coming from Meritz Securities, Kim Jung Wook.

[Jungwook Kim, analyst]

I would like to ask questions about processed food. Well, actually, if you think about the Q1, because of the prices and inflation, people are avoiding dining out, and we thought it would be much favorable for the at-home cooking, but the sales growth was not as high as expected. So what do you think about the background and cause of this situation? And what is your response to, I mean, in H2, the second half? And also, you have the core products like Hetbahn and Mandu with high growth. Then what about the products with low growth? I would like to know much more details about those products?

And next question is about the global sales. In the United States, a lot of people are paying high interest in K-Food, but we're not -- we would like to know if this is a fad and what's your opinion about this kind of phenomenon in the U.S. from the company's perspective? And would the trend sustain?

And the next question is about Europe. Still, the business size is quite small, but it is showing high growth potential. Then what about the additional expansion of Europe? Is it going to be based on the exports.

[Kyoung Suk Kang, executive]

Well, thank you for your question. Let me tell you about the processed food market in Korea. Well, because of the inflation, the dine-out trend and consumer spending is contracting. And we believe that this is our opportunity to capture the demand for dine-out. Well, actually, that was our expectations.

But if you think about the disposable income, it's going down. And the stock owned by each household is also going down and the overall demand for grocery also went down. And all these factors are affecting our -- actually, that have affected the expectations for us for the trickle-down effect. However, we believe that the overall demand itself is not going to be recovered. But this is going to improve because we have the holiday season and the year-end season. So based on our brand competitiveness, I believe we can respond to such risk factors.

All in all, aside from Hetbahn and Mandu, we have [ Ambience ] HMR products like [ Copban, porridge and sip N stew ].

So we are seeing the lowering down of the [ Ambience ] HMR. And based on Nielsen data, the market itself is showing negative growth.

So consumers are transitioning from the [ Ambience ] HMR to the products with whole ingredients included. So the CJ Cheiljedang is focusing on the development of the whole ingredient products to respond to such market demand.

Next answer is on K-Food. So actually, you asked about the ground that we judge that this K-Food trend is not a fad. Well, actually, if you look at the household panel data, IRI data in a comprehensive perspective, while consumers do not perceive this product as K-Food. for Mandu, Chicken and P-rice, these are perceived as Asian categories. And the competitors of CJ Cheiljedang in Asian categories are also seeing positive growth in their performance.

Well, if you think about the fad, we have this trendy products and CJ Cheiljedang is proposing and offering the K-Street Foods like Tteokbokki, Corn dog and Gimmari, the fried seaweed roll. So in the shorter term, in order to catch up with the trend in U.S., I mean, in Australia, Europe and Japan, we show -- we launched such products. But I don't think this is going to have a big impact in our performance, but we have the main GSP products. And I believe actually these products are showing constant growth.

And second, next on Europe. Well, we are trying to expand into the pan-European countries. So we would like to expand our geopolitical -- I mean the geographical footprint in Europe. And also we are trying to expand categories. So as you can see, the scale is going up, the territory is expanding -- and yes, it would be difficult for us to capture all the demand with the capacity -- manufacturing capacity in Germany alone. So we are preparing for that. Next question?

[Operator]

Next question comes from Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

First question is on, well, in Q4 last year in the earnings call for Q4 '23 sales and the OP estimates were provided, like 5% to 6% OP. But in the first half, sales were seeing some setbacks and there was the overachievement of BP. So are you adjusting some estimates for 2024 performance?

And second, I have a question on the processed food in Korea. Recently, the consumption has declined a little bit recently. And there are some demand -- lower demand for premium products and higher demand for value and cheaper products. So people try to intend to cook at home. And what do you think about these trends? Do you think these trends will continue in the future? And in your future strategies, you have strengthened HMR products so far. Is there any change in that approach? Or are you going to give any change to your existing strategy?

And last question is on the U.S. The pizza market share in the U.S. has been on the rise. But in the materials, there is only market share trend of Red Baron Pizza. I would like to know about the total pizza market share trend. And also compared to competitors, what are you doing relatively better by channel? So relatively, in what channels are you doing better than competitors?

[Kyoung Suk Kang, executive]

All right. Let me give you [indiscernible] on the annual guidance. In early this year, we provided the guidance, and we are not adjusting the guidance throughout the year. And as you said, in the first half, we generated the performance. And please consider the performance in the first half and the guidance we provided in early this year. And the estimates are not as different as the guidance we provided.

And regarding the consumption in the Food Korean market, many consumers and to cook at home, and these are trends these days. And for CJCJ, we have a broad product portfolio, including some cooking ingredients, including seasoning and sauce and other ingredients products. And also, we have chilled products like Tofu, Bean Sprouts and fish cake. Those could be used as cooking ingredients. So with our portfolio, we can respond, and we are responding to such consumer behavior change.

And for HMR, the megatrends are not changing. Still consumers are looking for convenience, so we're going to leverage the existing products, but enhance the product competitiveness, especially with taste and convenience so that with our HMR products, we can lead the market.

As for Pizza in the U.S. The overall MS, when we look at that, the representative brand is the DiGiorno and Red Baron. Those are top 2 brands in the U.S. pizza market. And as we mentioned earlier, Red Baron has surpassed DiGiorno with wide gap maintaining the #1 market share. And we have other pizza brands like Freschetta and Tony's.

We have broad portfolio of pizza in the U.S. as well. And the sales and the market share of pizza products in the U.S. are growing continuously. But when we compare with competitors, we -- and not clearly say that we can compare the market shares with competitors because the target segments are mass -- premium in value, but we have mass and premium products that are leading the market right now. So we cannot do the apple-to-apple comparison with competitors with the DiGiorno and Red Baron. And the Schwan's Pizza market share is on the rise continuously.

[Operator]

Next question. We're hearing none. [Operator Instructions] Next question is coming from Kim Jung Wook, Meritz Securities.

[Jungwook Kim, analyst]

I have more questions on the processed food in Korea. If this kind of consumer -- consumer trend changing space, then I would like to know if there is going to be any activities to boost sales, including marketing activities. And if the cost is going to increase.

And next question is about the U.S. In the past, you mainly mentioned about the penetration rate and ACV. But I would like to know how the penetration rate is going on in main categories in the U.S.? And in the U.S., the increase itself is quite going down and profitability is -- actually, I would like to know if this is affecting negatively to the profitability. And is it because of the promotion increase?

And the next question is about the selective profitability of BIO. I can see that it is showing positive change. So should we think that this is going to be turning around or being normalized? And what do you think about the overall industry outlook?

And the next question is about the Feed in Vietnam. So I'd like to know much more about the pork prices in Vietnam, and I would like to know about the price outlook of the pork in Vietnam. Thank you.

[Kyoung Suk Kang, executive]

Thank you for your question. Well, the consumption is slowing down and I can see that the demand of -- in the market is struggling, so I believe the competition is going to be intensified and promotional costs might increase. Yes, there is potential to see such trends. But if you look at the market, there is the demand change in online and offline channels. And there are approaches such as nonprice promotions by utilizing the brand promotion at retailers. So there are non-pricing promotions that we can leverage, so that we can maintain the same level of the marketing cost so that it doesn't negatively impact our profit.

And let me tell you about the U.S. Well, yes, we used to mention about ACV. But at that moment, we were in the very early stage of listing and that is why we are utilizing the internal indicators PSPW. And as you mentioned, in Mandu category, the ACV is increasing compared to the past that you mentioned, it's about 80%. We are maintaining that level. And as for other products such as chicken and processed rice, because the brand awareness of bibigo is going up, and we are leading the Asian categories. Based on IRI data, the ACV is about 60% for chicken and P-rice at 40%.

And let me briefly tell you about the U.S. business. Well, in 2024, our top line strategy is a little bit different from last year's. We are focusing more on volume rather than price, so that we can drive growth of top line. In particular, starting from H2 2023, our competition against company aim is intensifying. So we are leveraging promotions. And that is why the revenue reduction went up by a little.

And on this change, and actually, we are optimizing the ATL activities. And in order to respond to the competition, we are utilizing the BPL activities and also optimizing A&P activities. So we are managing our overall activities internally.

Next on Selecta. In 2022, it was a very good season for the Selecta business. But since then, starting from 2023, the company business slowed down. But in 2024, the industry is recovering because of the ingredient price going down and also the SPC inventory went down. So compared to Q1 and Q2, well, actually, we are seeing an improvement in performance, thanks to the increasing sales of soybean oil and SPC, and in Brazil, there was a policy being enacted about the biodiesel and the spot price of soybean oil is going up. And I believe that these positive signals are going to impact the industry by Q3.

Next is Feed & Care. While the livestock prices in Vietnam and Indonesia are normalized in Q2. And starting from last year in Vietnam, diseases impact the production volume overall. And because the government is regulating the imported meat, the overall prices and actually overall supply improved. And because the tourists from foreign countries are increasing, the demand improved, though Q2 was improved based on profitability compared to Q1.

And next is Indonesia because the profitability starting from the H2 2023 was not so positive. So the affiliates are scaling down their business sizes. And because of the supply reduction due to disease -- actually the supply is now normalized. And in Q3, the Vietnam is going to be impacted by the rainy season. So the livestock prices are going to go down by a little, but the productivity is going to improve and the COGM is going to go down, so the profitability of livestock is going to stay at a similar level to Q2. And next question?

[Operator]

Next question comes from Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

I have one more question. Regarding expenses, bibigo brand renewal related expenses were mentioned. So in Q2, how much was impacted in Q2? And is there any more expenses to be reflected in Q3?

[Kyoung Suk Kang, executive]

Well, in Q2, we had the bibigo renewal and we have conducted a lot of campaigns to increase the awareness of the new BI of bibigo and that's around KRW 10 billion for the marketing activities and most of expenses were executed in Q2. And in the Q3, there are not that many and limited. There are limited additional expenses. Any more question?

[Operator]

I would like to wrap up the earnings call of CJ Cheiljedang. Thank you for joining.

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