CJ CheilJedang Corp

KRX:097950

Earnings Call Transcript 2023-Q3

[Unknown Executive]

Ladies and gentlemen, I am [ Won Hong, ] Head of IR team at Finance Strategy. We'll now begin the Q3 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. [ Jang Gun Young ], Head of Food Korea Business Management; Mr. [ Jo Jae Bom ], Head of Food Business Management; Mr. Kim Jang Young, Head of Biobusiness Management; Mr. [ Choi Jung Ha, LF&T ]; and Mr. Hwang Hyun Joo, Head of Feed & Care Business Management.

Mr. Kang, the CFO, 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 a Q&A session.

[Kyoung Suk Kang, executive]

Ladies and gentlemen, I am Kang Kyoung Suk, CFO of CJ Cheiljedang. Today's agenda includes Q3 highlights, earnings analysis by business units, the indicator analysis and progress on key strategy execution, followed by Q4 outlook.

Let's flip to Page 5. First, Foods operating profit has turned to an increase in 3 quarters. Thanks to recovery in Korea sales and reduction in SG&A. Foods operating profit grew 12% year-over-year. Furthermore, in global or overseas, we have seen continued leadership in market share of core products, Mandu and Pizza, with continuous foray into new overseas markets such as Europe and Oceania.

In Bio, high-margin products such as Tryptophan and Specialty Amino Acid have been showing continuous growth as well.

Finally, for financial soundness, through active management of working capital and investments, net down is down about KRW 340 billion from the previous quarter. Next page, please.

Let's now look at Q3 corporate results, excluding CJ Logistics. Sales declined due to high base from last year and unfavorable business environment, resulting in total sales of KRW 4.6734 trillion. We recorded OP of KRW 275.3 billion despite base effect from last year, and volatility in external environments that have been partially offset by increase in Foods OP.

For net profit, despite a decline in OP, improvement in all operating items enabled an increase to KRW 178.1 billion. When including CJ Logistics, sales in Q3 declined 7% year-over-year to KRW 7.4434 trillion, and OP declined 18% to KRW 396 billion.

Next to Page 8, please. Let's look at performance by business units. First of Food. Amidst persistent global uncertainties, we have focused on nurturing strategic products and growth channels and streamlining SG&A for improvement in margin.

First sales declined 2% year-over-year. For Korea, despite some pressure from our raw material costs, thanks to sales strategies responding to a gradual recovery in demand, continued improvements in sales of processed food resulted in sales of KRW 1.6708 trillion.

For overseas sales, despite high base in the U.S., we have seen increase in market share of key products, Mandu and Pizza. And despite continued economic down in China and slow sales of Micho in Japan, acceleration of Bibigo in new territories such as Europe and Australia, resulted in overseas sales of KRW 1.3351 trillion.

For OP, despite continued volatility in foreign exchange rate and high raw sugar prices and slowdown in China and Japan, improvement in sales volume in Korea and the U.S. and reduction in SG&A resulted in OP improvement of 12% year-over-year to KRW 234.1 billion.

If you go on to the next page, OP margin in Q3 of 2023 was 8%, excluding Schwan's PPA, and 7.8% when including the PPA.

Next is more details on food sales in Korea on Page 10. Amidst economic slowdown and slow demand in Korea, we targeted at home demand with core products and optimized strategy by channel.

For processed food with product differentiation strategy by channel, we focused on expanding sales resulting in a volume turnaround. For Food Ingredients or FI, amid persisting base effects from last year, a decline in sales of cooking oil has been offset by increase in sugar and flour sales.

And on to the next page, let's look into the details of overseas sales. In the U.S., despite high base impact from the previous year, Mandu and Red Baron Pizza solidify their market leadership and share, continuing their growth trend. As a result, sales grew 1% with quarterly sales standing at KRW 1.0917 trillion.

In Asia Pacific and Europe, despite continuously slow demand in China and Japan, there has been a successful entry into mainstream in Europe and Australia, indicating good progress for K-food expansion into new territories.

Next is Bio and NFT. First up, Bio. Increase in Tryptophan demand and marketing on functionality of specialty amino acid led to growth, but there has been added pressure from last year's high base for bulky amino acid and slowdown in Selecta's business environment. As a result, sales declined 17% year-over-year to KRW 898.7 billion. OP declined 90% year-over-year to KRW 10.2 billion.

Strong performance of Tryptophan and Specialty Amino Acid offset a decline in bulky amino acids, but OP declined nevertheless, due to slowdown in Selecta's performance.

For FNT, pressure from high base from last year and continued global inflation resulted in weak sales across the board, and sales came in at KRW 159.5 billion, down 30% year-over-year. OP came in at KRW 36.9 billion, down 40% year-over-year. Despite improvement in the cost competitiveness of nucleotides, OP declines due to weak demand in North America and in Europe, the key markets of Specialty Products & Nutrition.

If you see the next page, share of specialty products has been on the rise, currently standing at 19% as of Q3 of 2023.

Next on to Feed and Care. Despite efforts to improve OP, F&C turns to deficit due to unfavorable business environment. Sales stood at KRW 609.2 billion, down 21% year-over-year, and OP recorded minus KRW 5.9 billion.

For Feed, government policy to control supply and declining demand due to price increase and demarketing of low-margin customers led to fall in sales of Feed in Indonesia.

For livestock, cost pressure and fees rose in Vietnam, and pork demand slowdown against weak pork price increase compared to the previous quarter, resulting in lower profitability. In Indonesia, reduction in poultry supply led to higher prices versus previous year, resulting in OP increase.

Now on to Page 16, performance of CJ Logistics. Although sales declined due to a decrease in global trade, improvement in profit structure resulted in significant growth in OP. Q3 sales is down 6% year-over-year at KRW 2.9371 trillion, but OP is up 16% year-over-year at KRW 124.8 billion.

And jumping to Page 19, you can see SG&A nonoperating items, excluding CJ Logistics. For SG&A, labor costs declined by KRW 47.3 billion and transportation cost increased by KRW 36.6 billion. Transportation costs rose year-over-year, as part of transportation costs previously classified SG&A was reclassified as cost in Q3 of 2022. Consequently, SG&A to sales ratio rose 1.4 percentage points, but we have been able to keep it at 22% range throughout the year.

Nonoperating expenses stood at minus KRW 44.4 billion, an improvement of KRW 45 billion from Q3 of 2022.

And when including CJ Logistics, SG&A on operating items are largely affected by CJCJ's performance, so I'll skip the details.

Next is update on key strategies and outlook. First up is key trend in the Korean food market. If we look at non-giftset process food monthly sales trend, we see that the decrease continued to diminish month-on-month and starting from July to August, it turned to positive growth. And in September, we achieved meaningful year-over-year improvement. Thanks to the momentum. Domestic food, if you look at the non-giftset, we see growth in plus growth starting from September.

If you look at the consumption-related statistics, the quarterly retail sales trend published by statistics Korea show that since Q4 of 2021, the numbers for restaurants and bars that used to be higher than that food and beverage turned to negative in the third quarter of 2023, falling below the increase of food and beverage consumption. This is due to weakening pandemic impact and revenge spending, and increasing inflation leading to slumping demands for eating out.

In addition, the recent new products and categories launched by CJCJ is recording high growth from first to third quarter. We anticipate sales for Food to rebound with the ongoing trend, and by reinforcing sales strategies based on ongoing partnership with retailers.

Let's go on to Overseas Food business update. Our key products are continuously gaining share in the market. Red Baron Pizza became #1 last quarter and the gap that -- with the second players widening in Q3 recording 20.6% in shares. Mandu also gained 3 percentage points quarter-over-quarter to 52.5%, which is double that of the runner up player, building stronger presence in the market.

Not only in the U.S. but in Europe and Oceania, where we are tapping new markets, we're seeing significant growth. In the U.K., we have expanded to Ocado and Asda, the mainstream channels. Ocado, U.K.'s representative online retailer, we've newly listed frozen rice, K-sauce, seaweed snack and kimchi.

At Asda, the leading off-line retailer, we've newly listed our seaweed snack from September. In Australia, we've listed 3 SKUs of Mandu in May and July, respectively, across all 1,000 stores of Woolworth, the local supermarket.

The Mandu SKUs are selling well, bringing sales of Oceania region to 10 billion in Q3. Thanks to these efforts, accumulated sales growth from Q1 to Q3, 32% for Europe and 24% for Oceania.

Last is update on globalization of K-street food. We've selected Tteokbokki, Gimbap, Gimmari

Bung O Pang, Corn dog and Hotteok as our six strategic K-street food products. We will be focusing our commercialization and overseas sales efforts for these 6 products.

We launched a frozen Gimbap in Japan in March and sold 800,000 products. 25,000 sets were sold out during the Asian fare at Costco in September. We're seeing great results and listed in 2,000 outlets, including the Aeon Mall. [indiscernible] Tteokbokki was launched in June, sold across 39 countries, including the U.S. and Japan. We launched 3 flavors of Bung O Pang in July, preparing to enter global markets in the future.

We've recently launched frozen Tteokbokki and fried calamari, building up our K-street food lineup.

Next is FNT, TNR Nutrition update. TasteNrich saw a decrease in sales due to slumping downstream like premium segments and alternative meat from inflation and economic recession during the first half of 2023. However, we are seeing signs of rebound in the third quarter, forecasting sales to increase 49% in the second half. This is because we are seeing expanded application of TasteNrich, and thanks to the increase in sales accounts, and we believe this is going to continue in the second half.

Let's go on to the nutrition update. Daily health management and wellness trend is ongoing. After the [ pandemic ] global health food market is shrinking. Despite that, we're seeing opportunities for our specialty solutions as preference for scientifically proven ingredients grow.

In response to that, we secured efficacy results of ActiveNrich, a glutathione-based naturally fermented antioxidant solution, to enter major downstream industry worth KRW 1 trillion, including Antioxidant Synergy and Sports Nutrition and to create new demand. Based on this, we will expand sales by sequentially entering regions in 2024.

WellNrich is a natural enzyme-based fermented mineral solution with zinc and iron, targeting essential nutrition market, forecasted to record double-digit growth until 2027. We plan to develop an essential solution portfolio, which caters to a healthy aging, life cycle-based health management.

Next is update on sustainability initiatives. CJCJ published its sustainability report in July. And for the first time, we measured greenhouse gas emissions, not only in our manufacturing site but for Scope 3 as well, that includes all value chains. We built greenhouse gas inventory at 6 global sites, including Indonesia, China, Vietnam and the U.S.

Thanks to increase in renewable energy usage, purchasing of REC, the renewable energy certificate, and introduction of solar energy, we were able to curb emissions in 2022 by 6% versus 2021. Moreover, CJCJ has been safely managing and preventing quality issues across all value chain from R&D to manufacturing and sales.

Compared to standards of food safety management certification or global food safety initiative, we built a robust and differentiated global quality and safety process just for CJCJ, and rolling it out systematically across the globe, including Korea.

To provide safer food, we are expanding the food safety system certificate from GFSI continuously. 90% of all our 58 global sites have been certified.

Next is on Q4 outlook. Korea food may see sales reduction due to timing difference of Lunar New Year, but non-gift set sales is forecasted to see volume increase, as year-over-year base burden ease. Process food consumption rise to replace signing out due to economic recession and inflation, stronger partnership with off-line retailers, and as we develop online DTC and strategic platform partnerships.

There are foreign exchange rate and raw sugar price pressures, but this is expected to be offset by stable grain and food raw material prices. We expect margin to improve versus last year with tighter management of SG&A.

Global Food business is expected to recover growth, thanks to Q3 advertising effects. Peak season sales increase and increase in GSV sales such as Mandu and P-rice with new product launches and increased promotion.

China will tightly manage its cost and SG&A, in a response to prolonged economic recession and focus on profitability improvement and qualitative growth by expanding in high-margin channels.

Japan will work to boost GSP like Mandu and Kimchi, and expand sales of small bottle Micho and new RTD drinks, to respond to inflation to minimize influence of shrinking consumption.

Bio. Thanks to fundamental growth of Tryptophan and Specialty Amino Acid. The performance for amino acids will recover, but there will be pressures from weakening outlook for key Selecta products and [indiscernible] raw sugar price.

For FNT, with demands for TnR and Nutrition in North America and Europe recover, sales is forecasted to pick up. With profit maximization strategies and higher sales during peak season leveraging leadership in Nucleotide market, FNT is forecasted to see higher profit versus previous quarter.

For Feed & Care, we expect to see easing cost pressures and decreasing supply in the Vietnamese hog market, but prolonged consumption shrink will also exist.

Considering all this, CJCJ corporate performance has pressures arising from increasing raw sugar price and segment SPC and soybean oil business. However, considering improving sales volume in Korea, recovering food growth in the U.S. and continuing growth of Tryptophan and Specialty Amino Acids for Bio, peak season for FNT Nucleotide and rebounding TnR, we forecast operating profit increase versus last year.

2023 Q4 corporate sales is forecasted to fall by low single-digit percent and OP margin around 4% to 5%.

That is all we have prepared for today. 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 slowly for the interpreters.

[Unknown Executive]

[Operator Instructions] First question is from Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

I am Park Sang-Jun from Kiwoom Securities. I have 3 questions. Number one, if you look at the process food in Korea, we see that the sales is rebounding. So how do you foresee the Q4 and 2024? How do you see the volume increase? How far do you think the volume increase? And what will be the main driver of growth, other than the macroeconomic factors, such as new products or category-wise? What do you see the main driver for the growth?

And second question, if you look at Bio, Q3, the OP margin, Selecta is in the deficit, but taking that out, I think the profitability is very low. Is it -- I see an increase in the spot price for Lysine, so if you take out Selecta, how do you see the Q4 numbers? Do you think it will be in terms of profit and margin? Do you think it will improve in Q4 versus Q3?

Last question is on the U.S. market. If you see the sales growth rate, we see that it has become stagnant somewhat or something. It's slowing down. So if you see Pizza and Mandu, the growth rate, we see that this is going to pick up again, but it's only 3% to 4%. So what were the factors that have played in curbing the growth rate?

[Unknown Executive]

First, I will answer about the growth rate in the U.S. So if you look from the dollar point of view, it is higher. So just -- I just wanted to point that out. And actually, in Q3 last year, we had high growth rate because we took pricing actions. We took some pricing increase. And above all, the GSP like Mandu, we had the MVM promotions in Q3, and that led to the increase in volume last year.

This year, in Q3, we did not have seen events. So we see that comparatively, it seems lower. But of course, the market share and the market position of CJCJ products, we are growing continuously.

And just to add, in Q3, it may seem slowing down from a short term, but we did grow 3% as of the U.S. dollar, but we believe in Q4, we will see growth and great promotion with Red Baron and Bibigo, Mandu, and we see -- we have the MVM promotion for Mandu and P-rice with Costco planned in Q4. So we believe we will grow in the high single-digit percentage in Q4. And if we look at the recent trends, we believe it's quite probable.

And to answer your first question, I will cover the main drivers of growth. If we do have some macroeconomic factors in play, but there is the price gap with the restaurants versus processed food. So the consumers are turning for dining in because it's much more convenient and if you look at the sauces they use to cook and [indiscernible] which are food ingredients they use to scratch cooking, we see that the consumption for these products are ongoing, then this is going to continue in the near future.

And as we see slumping growth for other products, we believe the value for our brand and reliable brand is increasing. So we see volume increasing for our products with long-lasting history and heritage from process meat, the [indiscernible] brand and white meat, they are seeing rapid growth and from frozen HMR, the [indiscernible] Chicken, where we have applied our new only one technology are selling well.

In addition, with [indiscernible] we see that [indiscernible] or Konjac rice, these products that are targeting wellness trend, we've seen decent volume for them as well.

So in Q4, the amino acid business, we expect a significant growth versus Q3. The fierce competition will be easing in Q4, and we believe the business is stabilizing. And the scale-up and restructuring is happening in the Chinese players and CJCJ, we are developing the market and creating the market with differentiated technology. So we expect significant growth for specialty amino acids and Tryptophan.

[Unknown Executive]

Our next question, please. This one is from Mr. Kim Jung Wook of Meritz Securities.

[Jungwook Kim, analyst]

My first question is for Food. I mean, there has been significant profitability improvement. So can you break it down between Korea and overseas and how they respectively contributed to such improvement?

And my second question, if we think about our growth in the U.S., you have an outlook of high single digits. I'd like to know about your product and channel strategy for the U.S.?

And as for K-street food that you mentioned earlier, we want to know how much sales you're planning from K-street food.

And my final question is on Feed. For feeding -- for Feed, there has been some spread between performance and price, so we would want more visibility on Q4 outlook.

[Unknown Executive]

So on your questions for Food business unit, you have been asking for more breakdown between Korea and overseas. In the third quarter, if you think about the improvement from the previous -- I mean, from the quarter last year, there had been improvement in Korea and processed food. And in particular, rather than -- instead of looking into costs, we would have to say that there has been improvement in our SG&A reduction efforts, such as advertising and promotions, so there had been much improvement there. That's one factor. And of course, we would be continuing those efforts into the fourth quarter as well.

In terms of commodity costs, of course, there has been some pressure from rising raw sugar prices, but for other commodities or grains, they have been returning to normal rates. So based on that, we would be seeing improvement in input costs as well. So we would be able to see additional impact from that as well.

And as for our outlook for the U.S. next year. We may not be able to give -- flash that out too much at this point in time, but if we think about it, in the U.S., if you think about GSP growth next year, we would be launching more new products. We would like to use that as a driver for growth. Especially for Mandu, we would -- are considering diversification of formats, where we can provide more crispy products. And for steam dumplings, they're actually doing well. So we would be looking into expanding that or accelerating their entry into mainstream.

And of course, accordingly, we would be expanding capacity as well. Especially along GSP products, when we look into chicken, in Korea, the new product has been -- new product [indiscernible] has been doing well in Korea. So we would be launching that product in the U.S. as well next year.

Additionally, for K-street food, I mean, that you just mentioned. When we look into K-street food for this year, the volume may not be very big next year. We are planning to strengthen K-street food in ethnic, in both ethnic and mainstream. So that's our plan for next year.

[Unknown Executive]

And to JB's point, in terms of profitability of food, other than processed food in Korea and overseas in the U.S., it may not be as high as the first half of the year, but there has been some improvement in margin as well in the second half of the year. So I just wanted to add that to the previous comments.

And as for the question on Feed and Care, in the third quarter, for livestock, our manufacturing cost is the highest. So when we think about the input costs, for example, for pork, there is some lagging factor there. So there has been declining commodity prices in the second and third quarters. But in terms of costs, the impact has not been materialized yet, so it would be the highest in the third quarter.

And in the fourth quarter, there would be continuous and gradual improvement in those factors. And at the end of the year, in Southeast Asia, there would not be dramatic improvement in consumption, but there is a strong demand -- likely to be strong demand at the end of the year. So that could be helpful to us. So compared to the third quarter, we are expecting some improvements in profitability in Q4.

[Unknown Executive]

Next up is Park Sang-Jun from Kiwoom Securities.

[Sang-Jun Park, analyst]

Thank you for the second opportunity. I have one more question. If you look at FNT business unit, if we see from the first quarter, it has been newly created. In the top of the year, we see the rebounding expectations and the reopening of China. We believe the profitability will increase. But if you look at the quarter-over-quarter trend from quarter 1 to quarter 3, it has been decreasing and being bearish. So compared to Q3 -- and you wrote down the Q4 forecast that it will be expanding from Q3, so could you add more color to that?

And if you see in FNT, what would be some ways to increase the margins? I don't think that could be just be done with new products. Maybe you might have to increase the price for the nucleotide or pivot your strategy for the cash cloud products?

[Unknown Executive]

To answer your question regarding nucleotide, we see uncertainty ongoing in China. So in Q3, the flow has not been good, but the Chinese government is planning on implementing economic boost measures, and we are on the brink of the peak season, and we see the stocking-up season upcoming. So we believe Q4 will be better than Q3 because of those factors.

And other than nucleotide for TNR, every quarter, starting from the first quarter to the third quarter, we see inflation and economic recession playing in what we see easing the excess of inventory, and we see improving demand from our clients. And next year, we believe major CPGs or trainees or major Chinese players, we do have some strategies planned for the key accounts as they go well as planned, we believe we will be able to improve our profitability versus this year.

[Unknown Executive]

We will take one more question before we close.

The final question is from Kim Jung Wook of Meritz Securities.

[Jungwook Kim, analyst]

So in processed food, you mentioned that there has been a reduction in SG&A. So can you be more specific about where the reduction has been made? And as for the impact of the reduction, let's say, when demand goes down or when there is some pressure in volume, would you be picking up in terms of marketing spend? So that's my first question.

And my second question is, as we enter 2023, there has been the [indiscernible] and Selecta sales. So we'd like to know about your plans to as to how you're going to leverage those proceeds?

[Unknown Executive]

For SG&A reduction in Korea processed foods business, there would be fixed and variable costs, and we had been continuing efforts to reduce both pros and especially for labor costs and advertising costs. These were areas of focus. And of course, there's also the -- any those expenses not relevant to volume expansion, there has been improvement there. And we're seeing that impact being materialized.

So when -- even when the demand goes down, we would be focusing on our brand and products and play out in the market. And if right now, the market is pretty much slow and all manufacturers are trying to refrain from using excessive -- there's not going to be excessive promotion-based competition. So marketing costs could be directed to building brands.

We would be continuing efforts to strengthen our brand and products. We are not anticipating excessive promotion-based competition, so we would not be spending excessively on promotion as we move forward.

For the next question on -- before I go on to your next question, just to add on to what I previously mentioned. As for the U.S. growth outlook, we -- I mentioned that there's going to be high single digit. This is not for next year, but this is for the fourth quarter of this year. In terms of dollars, we are expecting a recovery to high single digits in the fourth quarter.

And on to your next question regarding [indiscernible] and Selecta. So we've had the announcement of the divestiture of these 2 subsidiaries, and the meaning of these divestitures that in Food and Bio, we want to go for more select and focus in terms of our business portfolio.

As for the proceeds from the divestiture, for [indiscernible], we would be levering [indiscernible] our existing business or improving our financial structure, that's one plan. And for Selecta, the deal has not been closed yet, and we cannot determine the specific time line yet. So everything is up subject to change. So as of now, that would be used for strengthening competitiveness in our Bio business unit.

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