China Mengniu Dairy Company Limited (OTCPK:CIADF) Q4 2023 Earnings Conference Call March 26, 2024 9:30 PM ET
Company Participants
Lu Minfang – Vice Chairman and Executive Director
Gao Fei – CEO and Executive Director
Zhang Ping – CFO
Li Pengchen – VP, Group Affairs Head
Conference Call Participants
Xiaopo Wei – Citi
Chen Luo – Bank of America
Lillian Lou – Morgan Stanley
Unidentified Company Representative
Investors, analysts, reporters, good morning. The 2023 Annual Results Announcement of China Mengniu begins now. On behalf of China Mengniu, I would like to welcome you all to this session and for your long term support and interest and investment into China Mengniu, I would like to express my gratitude.
Now let me introduce to you our management. They are Vice Chairman and Executive Director, Mr. Lu Minfang; Chief Executive Officer and Executive Director, Mr. Gao Fei; Vice President and Executive Director, Ms. Wang Yan; Chief Financial Officer, Mr. Zhang Ping; Vice President, Mr. Luo Yan; Vice President, Strategy management person in charge, Chen Yiyi; Vice President, Group Affairs Head, Mr. Li Pengchen; Company Secretary, Mr. Chris Kwok.
Now let’s begin the first part of today’s session. Mr. Lu will go through the company’s 2023 results. Mr. Lu, please?
Lu Minfang
Investors, analysts, media friends, good morning.
Yesterday, I believe you read the company’s announcement. You may be surprised. However, based on some strategic considerations that is an important decision of the Board and the Board and the company’s management hope to continue to make our company stronger and bigger. That’s a signal and confidence on our part.
So I believe friends will have confidence in our company. Mengniu will continue the growth of existing business and also we will expedite innovative business and globalization strategies. We will develop young and next-generation management leaders. We’ll continue to create value for our investors and working partners.
Yesterday was 26th March. Today I’m in the capacity of Vice Chairman and Executive Director. So I would like to express this on behalf of the Chairman. This adjustment to the Board will be beneficial to the overall development of China Mengniu, and it can maintain long-term stability and achieve high quality development for the company.
So with these remarks, then I hope that we will focus more on today’s presentation and discussion about our results. Sof if there are discussion about personal perhaps those can happen in the future in private.
Now as usual, I will first do an overview of our business and in the following Q&A session, Mr. Gao Fei will continue the discussion with you.
2023 financial overview. I think you have read the information on our annual report. In 2023 for Mainland dairy product industry, there were both challenges and opportunities. You can see that our overall revenue was up 6.5% in the industry. This growth rate is very fast. Part of it is because of consolidation into the financial statements but excluding that effect, our growth among all dairy companies is leading so I think we are proud of this.
Our growth momentum is still quite good. So this is about revenue. Gross profit also expanded. You can see here, gross profit growth exceeded growth in revenue, so there is expansion of growth profit. Now one important point is the decline of milk price. So as a result, gross profit increased before the overall structure we maintained a good structure.
Operating profit margin up 40 basis points for the whole year. It is in line with our guidance. Well in the second half of the year it was not as good as expected. In the first half we expanded by quite a large margin but for the whole year it is still quite good.
Net profit margin, attributable to owners of the company there are a few factors impacting it. In our financial statements you can see these points. In 2023, milk no powder separate from an impairment, so there is an impact. So from EBIT to net profit attributable to owners, so there is an impact besides we continue to pay dividend. So there is with holding techs for offshore dividend there is 300 million together. The total amount was 200 something million. So this is different last year from previous years. Our growth rate is still leading the industry our profitability especially our operating profit margin is healthy.
Revenue. If you refer to our core business it is still liquid milk. Liquid milk growth is almost 5 points. So in our liquid milk business we achieved growth in our sales market share. This is very important because this is our core business.
And then ice cream business. Ice cream business grew 6.6%. The biggest contribution is from Southeast Asia our ice grew strongly. Besides the trend is going up. So we maintain a high growth rates. Besides for milk formula business, there is slight decline.
Now for infant milk formula, the market is a bit weak so that’s why. But then for adults and elderly milk formula, growth is still quite good. Later on, I will give more details.
For cheese right now, cheese has become one very important growth driver. Business goal exceeded milk formula almost 400 million. We have our own cheese business and also the milk rose business. So I believe cheese is just a start.
And if you look at our company’s operations, our cash flow, CapEx and shareholder return show a positive uptrend. So, 8.35 billion net cash inflow. Our capital is coming down. CapEx coming down. At the beginning of the year we said that our investment peak was over in the coming few year if you talk about utilization of capacity and capacity expansion, well we don’t need to invest a lot of capital. So CapEx will continue to come down. As a result, we will have improvement in our free cash flow. So that is why this time in our announcement, we announced 40% dividend payout. So, a rise from 30% to 40%.
So according to this trend, I believe that our overall cash will give more room for increase in the future for dividend. Selling and distribution expenses went up, administrative expenses were stable. Now the increase in selling and distribution expenses is that in 2023 after recovery of offline we invested more. However there are other factors in relation to surplus of raw milk.
So on the terminal, in order to expedite product circulation, we made some investment. We also cultivated deeply into channels. Now every year when it comes to digital distribution and weight distribution they all increased. In the future we continue to improve our operation capability. This is one very important drive.
And if you look at other metrics, other operational efficiency indicators, they are improving. No matter whether we look at inventory or receivables, we’re doing quite a good job. So, given the overall consumption growth and market growth being not very strong, our operation and inventory management is done very well. Just now I gave a financial review. More importantly, I think I need to spend more time to share with you what measures we have taken so that we can maintain growth.
So now let me talk about our business. In 2023, our UHT, well, actually, because Milk Deluxe grew strongly, so for our UHT business, including our dairy beverages, they continued growth and the structure also improved. After the pandemic, our offline product layout has improved. So deep channel cultivation is an important growth engine for the future. Channel structure has improved. After some changes in the new scenarios for offline, we cultivated deeply in different channels and scenarios. That is a result of our past few years’ efforts. So that’s about room temperature or UHT. So growth was leading.
Then for chilled products, this year there is quite big improvement, especially in the second half of the year. Overall speaking, for chilled products, especially chilled yogurts, we focused on high quality, high value products. Now for our YO!FINE DIARY, well we received a lot of good feedback from consumers and also customers.
In the past few years, for chilled products, their profitability was not very good, but Mengniu chilled products starting second half last year, our profitability improved a lot. So for our high-end products, we saw quite good growth.
This is something that’s quite rare, actually. You can see that for our chilled product market share, we continue to increase by end of February. And we have been able to achieve a new record high for our chilled business.
Fresh milk has always been a very strong growth point for us especially for high-end fresh milk even if for the whole industry fresh milk business is on the decline. However, we are committed to building Shiny Meadow.
In the meantime, we have a very strong fresh milk online business and which is that delivering milk to your home and this is a new model of online business and the only channel that we have has helped us to continue to grow our market share in fresh milk business.
For ice cream, I would say that our growth in ice cream in China is not as fast as Southeast Asia. The latter enjoys 20% of business growth and right now we are number one in Indonesia, in Philippines at number three but very close to number two, and we believe that this year we would be able to become number two or one in the Philippines.
Our expansion in Southeast Asia is very fast, whether it is the World Cup or the Olympics and the collaboration with those events have boosted our brand image in the Southeast Asian market and I believe that for brands such as ICE and in terms of its business growth will continue to enjoy very high growth.
Moving on, talking about milk formula, two points. One is Bellamy’s enjoying growth of more than 40%. We are working very hard to continue to improve Bellamy’s. And in terms of a new formula for baby formula it is just the growing we have not yet seen very strong growth however looking at it today for our domestic milk formula business that has already moved on from the loss-making period.
In terms of the middle-aged and the elderly milk formula, we have a lot of good products on the market and they are performing well. I believe that 2024 in adult milk formula we will have some bright spots.
In terms of cheese business, similar to what we had talked about mid of last year and in Q4 we already see that cheese business is warming up again and in Q1 this year will do even better. I think that we need to give it a bit more time and right now especially To-C and they are seeing some challenges however To-B signed and they are growing very well and for cheese it’s a business that To-B and To-C are very well connected through our own business, milk ground, ice, et cetera.
And To-B and To-C, I believe that we will see very strong growth momentum and progress being made. I think that the cheese business has already opened a new chapter and for the cheese business what’s very comforting to me is that some of the not so great brands will be phased out by the market and for those brands with long-term strategies in the cheese business starting from 2024, I believe that we will have a very solid growth foundation.
So this is on business and of course we also need to talk about ESG. Regarding our ESG strategy you can see that we have done a lot of significant work in ESG whether it is forest protection or animal welfare, nutrition and health policy, responsible marketing, et cetera.
And the result obviously you can see whether it’s MSCI’s grading right now we have been upgraded to AA and fair number one among Chinese companies, top 10% in the global food company industry and all these work that we have done have laid a very good platform and a better platform I would say and yesterday we had our Board meeting and our European Director has also asked us about our ESG status in China and we were very proud to tell him that today in China and also in this whole market our ESG we are the leading player.
Another very important point on ESG which is compliance governance. We have always said that we want to build Mengniu into a world-class company and compliance is a very important – compliance and governance. So in 2023 we have been able to receive the award of CQC SGS Compliance in Management System Certificate and we are the only one in China that has received this. So this has laid a very solid foundation, and we’re the only one in the dairy industry.
So let’s now look into the future in 2024. And if there are any further questions, I will answer them later. So for the overall dairy industry and the overall growth, let’s first take a look. It has entered into the second half of development. It’s quite stable I would say. We had talked about this for quite a while and for the industry if we look at our business structure is quite singular and this is why we started doing this work second half of last year and which is that we are upgrading all our business and for instance for the consumers in the trend that they can see they have already observed this trend and however in terms of the supply chain and there is a lack in here and because we are currently in a period of oversupply of a raw milk it’s even more important that we need to further push forward our restructuring changes and in the meantime, the demand has changed, consumption upgrade and going forward is some of our advantage as a top player and for instance from our liquid milk from our yogurt and to the cheese and you can see that so we are now all trying to become a top player in all these segments and this trend has already been formed. It’s very difficult for others to reverse this, especially from last year for some of the small and medium sized dairy companies that they are being challenged.
And I do believe that we will see better opportunities. And of course those are the backgrounds of the industry and I think that what you’re seeing is only temporary that the growth has slowed down. Our overall structure has not yet completely transformed or the whole industry has not yet completely transformed. We are also aware of this and going forward we will continue to focus our efforts on these areas.
In 2024 we have also launched the 1-3-2 strategy and one is creating value. At the moment, in this backdrop of consumption, we need to consider more about for our clients and the consumers how to bring more value to them and this is a very important key part of our work to support the value creating.
There are three focuses. One is R&D to increase efficiency, brand building to bring premium and digitization and upgrading to upgrade our marketing and sales. And of course very important we use R&D innovation to help us to launch a better product to our consumers so two acceleration, one is a channel optimization and the continuous optimization.
If you’re in this industry for a long time, you will feel that actually if going back for the past five years in the Chinese channels there have been huge changes whether it is for instance the market or the e-commerce, a different setting market and if we extrapolate for the past five years that there has been a huge change happening.
So how do we further optimize our channel and do better? Another accelerating is about new business. So let me elaborate. For the future, for a longer period of time, how can we built a more profitable, more valuable Mengniu that is very important. Now let me elaborate a bit. We talk about value creation, quality growth. Now for the industry, for consumers, for shareholders, we would like to bring more value, better value.
So this is the focus of my future work. Just now I talked about three focuses. So we focus on R&D innovation, as you can see, we actually invest a lot on our manpower and we made much effort. First, we have to upgrade our product taste and value. So you have to taste our products apart from our strong, for example, UHT milk beverages.
I think you should first try our Shiny Meadow. And then you must try our chocolates ice cream as well. I think this product is definitely better than another product branded with the brand with a beginning with letter M. So I think for Mengniu in ’23-’24, we’ll continue to launch better and more tasty, more valuable products. At the same time, we also move towards more personalized, more functional nutrition.
So here you can see functional yogurts for the elderly and also zero additive just yogurt. Now for the investment circle, many people enjoy sports and doing exercise so I think you need to try our new products. Liquid protein and also in Kenya as you know those athletes those runners do not eat rice in the morning they eat other thing. So I think you need to try it.
It is not only about good taste. If you drink it you will be able to sit here for the whole day and you will still feel energetic. I think our logic behind is that we hope that we will offer more personalized functional nutritious products and bring those into our product line
And then HMO our R&D has already born preliminary results. In the interim period we said that in China there are 3 enterprises on HMO which have been approved. So we are the only Chinese company being approved. There are two other companies which are MNCs. So I think this is a very outstanding technological innovation.
And then this point perhaps is familiar to you. Now our brand building has been our strength all along. And now we focus more on long term brand building. For the Olympics, we are already planning towards 2036 and World Cup 2030. So an aerospace 20 years already, then MBA 10 odd years. So for each of these collaboration relationships we have been building our brand over a long term.
So we have persevered in this area. And then let me talk about our digital transformation. Overall speaking, if you look at our operating capability, last year we did a few things. First, Ningxia factory. I think many investors have visited it. It is not an ordinary factory. Well you need to bring some digital people or digitalization people to pay a visit.
And then based on large language models, we have the Mengniu Health application platform. For this application platform in China’s nutrition platform, ours is the only one. Then we also did channel optimization. Just now I already made the point. I won’t elaborate too much. For To-B and To-C, we are doing channel upgrading and optimization.
In the past few years, we did a lot on channel upgrading and channel expansion. But today, when it comes to channel optimization, it is about omni-channel ability and multiple scenario capabilities to To-B to To-C are covered. So in the coming 20 years, this is going to be an important work. So this is about acceleration in channels. Besides, we need to accelerate new business development. Today, its contribution is very small. When it comes to, for example, sports nutrition, we are doing a good job.
In that vertical, we have one very good word of mouth. And I think it is the most professional sports nutrition platform. So that is M Action. And then we have already built a relevant factory for infants and the elderly. So it is a high-end factory. It has been built already. And now we are working on overall approval because it is highly regulated business. And of course, the benefit is that threshold is high, entry barrier is high.
Our products will serve children who need a lot of protein and at the same time we will also serve those similar to PKU children. So in the sports area for infants and elders, we are putting in efforts at the same time.
Today, the contribution to our business is not very big, but then in the future, it is going to be an important growth driver. HMO technology and there are other work areas in relation to probiotics.
So all these are research driven. This year after all these are done within two to three years time, I don’t think there are any other mainland companies that can replicate our work. So this is our own driving force. Our proprietary R&D is related to nutrition and also related to businesses that can support our future growth.
Now, in this industry, in the short term, there will be pressure. Well, if you look at, for example, consumer goods, including dairy industry, there are external challenges and pressure. But I believe consumption will be diversified, and high quality nutrition and health products will not see a change in demand. Verticals and different market segments in the dairy industry will still see potential for growth.
We have to adhere to our strategic direction and then implement our 1-2-3 strategic code and then we should create better products, build better brand and improve our channel capability and then we will cultivate in the future battlefield for the dairy industry and to strive for high quality development for the future.
So that’s all in my presentation. Thank you very much for your support and interest in Mengniu and I myself. So in the next session I will pass the floor to Mr. Gao Fei. So our newly appointed President Mr. Gao Fei, I will invite him to say a few words. Thank you. So he is our new appointed Chief Executive Officer. Mr. Gao Fei, please?
Gao Fei
Okay. Thank you, Mr. Lu, for the presentation. Analysts, investors, media friends, good morning. Thank you very much for the trust from the Board and Mr. Lu. And I also need to thank the 40,000 employees in Mengniu for their support.
Well, we are familiar with one another. Every year there are a number of communications. So no matter who is in this position, you may be thinking off whether our strategies will change but I can say firmly to you that under Mr. Lu’s leadership, all these strategies are actually formulated by the management. So our strategies will not change for sure.
However, if you look at our industry right now, this industry faces some challenge and we will face actively to these challenges. There is still much room for further growth and development.
We will strive for consumption iteration and digital transformation so that we can continue to create more value for investors, shareholders and consumers so that we can become a top-rate company in the world and we can enjoy high-quality development. So from this perspective, the management will focus on profitability, cash flow improvement and also return to shareholders.
I want to thank investors, analysts and media friends for your long-term support for our company. And thank you for your interest and support, as usual. Thank you.
Question-and-Answer Session
A – Unidentified Company Representative
Thank you, Mr. Lu Minfang; and Mr. Gao Fei. Now, we will proceed to Q&A. [Operator Instructions] Now question from investors and analysts first. First row. The one in white shirt, please.
Xiaopo Wei
Thank you very much. I need to thank my parents because I am tall so that’s why every time I get the chance to ask the first question. Now this is my question. It is not a question planted by the company. The company never plants questions. So then I would like to say this, all investor thank Mr. Lu. We thank you for the changes that you brought to the company. Just now I saw the two of you shaking hands, I feel so emotional. So thank you once again, Mr. Lu. We thank Mr. Lu for his communication with us and the guidance he gave in the past years And I hope Mr. Gao will continue this tradition and I hope you will continue to give us guidance.
So first question. How is your direct retail results this year? Last night the results were announced at around 10. So in 1999, Mr. Gao joined the company and he fought in the field, so to speak. And then when it comes to tactics, okay, you started in fighting a battle, so in the future, are you going to see more intensive battles or intense battles? Yesterday, there were many questions arising from your results. So there is no question about the strategies, but what about tactics?
And then, well, Mr. Zhang Ping is here. I would like to ask a question. So, impairment provision of 300 odd million for bulk milk, that is above milk price, and this year because of demand and supply, as we all know, there may be year-on-year decline. So, this year, when it comes to impairment, are you going to make any provision on that? Thank you.
Unidentified Company Representative
So this question is from Xiaopo Wei from Citi. Okay. Mr. Zhang, can you take the question?
Zhang Ping
Let me first make two points. In 2024, if you ask for a guidance for 2024, well, for revenue mid to low single digit growth, well, that is our judgment about the market. That’s our guidance. In the past few years, we have been communicating with investors. In the coming few years, we’ll continue to raise operating profit margin. This direction won’t change. So in 2024, our target is that operating profit margin should continue to rise by 30 to 50 basis points. This is our guidance for 2024.
You asked about impairment for bulk milk powder for 2024. Well, last year there was an impairment by 300 million. In 2024, there was oversupply of raw milk. So this condition will continue. Besides, this excess supply comparing with 2023 to certain extent may even be bigger.
So we still face excess supply of raw milk. There is no solution, so perhaps we have to package it into bulk milk powder. So when it comes to impairment, there will still be impairment. But please do not worry too much about this because yes, there is excess supply of raw milk but then price of raw milk will still come down so price decline will be able to offset the impairment loss on the year-on-year basis. That is the situation. Yes.
Okay. Well, let me comment on strategies. Competition is the norm in the industry over so many years of high-speed development. I think it is relatively mature. So when it comes to high quality stage for any enterprise, well, we have to think of this matter in a rational way. Yes, there is excess supply of raw milk, and in the short run, we have to digest the raw milk. It is a chain. So perhaps we have to focus on the supply side.
So in terms of strategies, we also have to think about our operations. We have to make sure that we can adjust product mix or structure. Now, regarding specific tactics or strategies, well, of course, we don’t want to sell at low price. Now, if you look at Milk Deluxe, it is getting more and more high-end, and we have more and more innovative products like Shiny Meadows, Bellamy, and Yoyi to fast growth.
So in terms of structure, we will focus on improving profit margin, no matter which category you are looking at. So you don’t need to worry too much. So I think for this industry, it is more mature and more rational now. Thank you.
Unidentified Company Representative
Okay. Next Luo Chen from Bank of America, please.
ChenLuo
Thank you, Management. Just now, Xiaopo expressed gratitude to the management on behalf of investors. And at the beginning, when the management stood up for a group photo, well, Xiaopo reminded me that that was a historical moment so that’s why I also took picture of you. I have three questions just now Mr. Lu said that today the main president charge is Mr. Gao but I have a question for Mr. Lu. Since 2016, Mr. Lu led Mengniu and achieved satisfactory results. But then, which areas do you think need further enhancement?
My second question is for Mr. Gao Fei. Now, Mr. Gao, you are an old staff in Mengniu already. You followed Mr. Lu back then. And then in terms of strategies, you just said that we need to maintain stabilization and continuity – stability and continuity. So in terms of strategies comparing with the past what kind of changes or refinements are needed and then in your management team what measures do you need to put in place to ensure stability and continuity between the old and the new management team?
And then just now, Mr. Zhang Ping said that this year sales growth will be mid to low single digit guidance and in the past few quarters for organic growth if we exclude the consolidation of milk ground it is a growth at low single digit The industry is not doing well but then, well for our competitors, they enjoy more or less the same growth rate. Their total volume may be bigger. So if you look at product mix, well I think for UHT yogurt, your share is not big, but it is not doing good.
And then white milk is growing quite good. It is number one. For Milk Deluxe, it is also doing very well. For fast growth rate new products, your layout is better than competitors. Given this broad structure, why is it that in the past few quarters, your growth rate is not much different from your competitors, or that means there is not much change in terms of your growth rate as compared to competitors. What are you going to do to boost growth rates in the future?
Unidentified Company Representative
Well, first question will be taken by Mr. Lu.
Lu Minfang
So when I wrote, well – if I am to write a review, well it will take more than one hour for me to make my points. There are both gains and losses. Well in the past one year, if you talk about operation of acquired businesses, well, the operation needs to be enhanced. In the industry, in the process of cycles, well actually in our history, there were a few acquisitions as you know. So today, if I have to look back at all these incidents, I think there is room for improvement.
Where is the room for improvement? Well, we can export better management people so that we can very quickly take over the acquired business and improve their operations. So if I am to do a review or if I could do the work again. Well, of course all these are ongoing. In the future we still need to do a better job.
Well, we spent quite long time in the process. So Bellamy has come back and so on and so forth. But then that this interim period was a bit long. I think we need to greatly improve our ability to take over and at the same time when we work on investment and development of new brands we have to be more determined.
For instance, Shiny Meadow, you can see that our expansion aggressiveness is not enough. So as a result, when it comes to resource allocation in our group, well, we were a bit too conservative. We should have allocated more resources to expedite those categories with better growth potential.
So I think this will be better. And well, let me share with you one takeaway or one gain. Now, for Mengniu, we want to develop a modernized enterprise with modernized governance. And at the same time, we need a long-term growth framework. And this framework is already formed. I think that is – well, if I have to look back from 2016 till now, because of this building of cornerstone, then in the future all leaders will be able to capitalize on their strengths at the same time we can ensure long term growth. So, I guess just to sum it up, that’s my view to respond to your question.
So I believe that you were also trying to ask about the other questions in the other areas. All consolidates them into one answer. So in terms of strategies, our strategies are very clear. In terms of our implementation of the decisions and as you say and perhaps in the future there will be some adjustment and be further strengthened and in terms of organizational level at the moment we do not yet have a lot of considerations. So that’s for now. Thank you.
ChenLuo
My last question compared with our peers in terms of product structure, you have your unique strengths and for the past few years as we haven’t really seen that you were able to expand your advantage and what is your development focus going to be on in the next few years?
Unidentified Company Representative
So Mr. Gao Fei would prefer me to take this question and supplement. Well, let me say a few words. So as a matter of fact, at the moment, the scale between us and our competitor, there is still a difference. So in this scale, if I want to achieve 1% growth, you would be able to calculate how big that is. And then to distribute that across our different categories. As you say, you know, single category we would enjoy very good growth, for instance, Shiny Meadow, et cetera. However, in the past – well let’s say in the past two years, the whole industry growth has slowed down. The whole industry comes down, then we are also affected. The whole scale, for instance, 100 billion is affected by the industry and there was a competition to fight for of 5 billion. Now it’s down to 3 billion, the market size, and even with the new products that we have and it’s difficult to really achieve too much of market share gain and I believe that this has answered some of your questions even if seems that all our products are enjoying growth and we have grown by about 3% organic growth and if our competitor grows by 1% or 2% but versus the decline of the industry as a whole, it does not match up and the whole growth if we are looking at 6% to 7% but if you look at the new growth it’s almost close to negative.
So I think that this is the main factor for this. And second we still have some product categories that are dragging for instance milk formula, or ice cream. Ice cream I’m referring to domestic ice cream and these two categories, are still dragging us down and these two sectors, we have not been able to resolve their growth issue. And what’s lucky is that right now, we have the overseas ice cream business, and for milk formula 2024.
We need to see how it is performing. Looking at it today, looking at January and February, I think that for milk formula will definitely be a lot better than the past two years, because a lot of the fundamental issues have been resolved. So, I feel that perhaps, this is some of the views for the category growth that I could shed some light on.
Operator
Okay. Lillian from Morgan Stanley.
Lillian Lou
Thank you for giving me this opportunity, to answer this question. And to follow-up, I’d like to ask a few more questions. If we look at the overall development for the dairy industry, there is a slowdown due to various factors. And we can see that there is a very low growth and in terms of the concentration, it’s very high in the industry. And we and our competitors, we all want to bring up our gross margin
But it’s a very slow and every year the investors are very concerned about the growth of our profit margin and listening to Mr. Lu we have a very good product layout. We are investing in new categories working on digitalization, et cetera. And however, for now, we can see that there is a shortage of new products coming out and in terms of the slowdown of the market and the growth margin, is not improving that much and what about the returns for the shareholders?
Of course, we’re happy to see that the dividend payout ratio has gone up and going forward, how do you balance the gross day and profit margin? And my second question, thank you Mr. Lu for being honest with us for the past few years in terms of the M&A and the premium isn’t that high. And there is still sometimes impairment and people are also concerned about milk ground and it’s a future development for the cheese business.
We can see that it has stabilized so what’s your view on milk ground and going forward in the next one to two years is possible that there will be some write-down on milk ground, or on your cheese business. Number 3, I also want to understand more about business expansion overseas. ICE has done quite well and for the other products in Southeast Asia or in some broader market and has more opportunities to develop? Thank you.
Unidentified Company Representative
Perhaps I’ll have Mr. Lu answer this question and our supplement.
Lu Minfang
Yes indeed, what you have said. We like inflation, because it will bring up the raw milk price. I don’t want raw milk price to come down, but this is of course a natural result of supply and demand. So short-term, in the short-term that is visible here and meeting our guidance target that’s number one. Second of operating cash flow to go up, and to give more dividend payout.
Short-term wise, if you are asking me, these are the few things we want to do and just basically meet the guidance targets that we have given to the market. And second, with this guidance, I do believe that if we can achieve those guidance that the operating cash flow will be very good, and we will definitely consider about better return for our investors.
So number one, I don’t think that we need to consider about whether we are going to be able to achieve 10% growth. That’s not realistic in today’s market. And this will also affect how we play the business, because everyone says that you know, are you going to fight a price war? No because fighting a price war is not the solution. It’s not simply about the price, without the volume.
And whatever actions you take, there will be no impact. So this is a number one and number two, for overseas market and Mr. Gao can supplement. I think that let’s not hurry. Let’s not rush. And we already have a mature model such as ICE, with the great business growth 20% and every year maintaining at this level, continue to see the margin going up and to do well in single different categories.
And then for the other models, let’s see if we can continue to grow. And for instance like many years ago you know we started with ice cream. And then we further developed into other sectors, so this is a better and more down-to-earth and realistic way of expansion overseas. In today’s environment, I also don’t really think that it’s beneficial for us, to have a further M&A. I don’t think so. Let’s be patient.
And as long as we have money on our work book, there is always going to be opportunities. Regarding the write-down, I’ll have Peter answer this question. So with respect to mill ground, let me say a few words. Last year, 2023, the revenue has decreased, margin has also decreased, and for the whole cheese business, we are not that pessimistic.
We still believe that this is an industry with a lot of development potential, because for cheese in China it hasn’t had a long history and for last year there was a decline of consumption, because it’s not a necessity for most consumers in China at the moment. However, going forward in the future we talked about to be and to see. These are two of our business and for 2B business actually there are many scenarios that.
They would consume a cheese business, and will continue to expand in these areas. So in terms of the whole industry, we are very optimistic. In addition for Millground, at the moment, their management team is very stable. Last year, there were some special situations and for this year, and so far it’s been very good. Just looking at it now, we do not really see a lot of pressure for writing down. And I don’t really think, there is any issue to worry about.
Lillian Lou
Okay. Thank you.
Operator
And we now welcome [Li Fu from Goldman Sachs].
Unidentified Analyst
Thank you for giving me this opportunity. And thank you for the sharing. Thank you, Mr. Gao, Mr. Lu. And of course, you had to shed some light on the changes of organizations and the structure, et cetera. So two detailed questions. And number one is that for liquid milk and the high end has done very well, for deluxe and you have achieved about RMB30 billion two or three years ago. And for the UHT, it has also always been your strong department. And for this year, how do you look at UHT’s continuous optimization and for this year for some of the functional product for instance of base milk et cetera. What are your targets and of course, we said that UHT is Mr.
Coffey’s department and going forward, you know you will be looking after across the board, and we also heard Mr. Lu saying that for ice cream and chilled and there will be more focus and strategic considerations. Can you please share with us? My second question is that just now Mr. Lu talked about this in terms of the channels changes, and optimization in the past five years.
Sometimes we feel it’s slow, sometimes very suddenly there will be a change, and for instance the online business and live streaming as well as O2O and their impact on the offline business. And we can also see that, for instance, in terms of the channel changes and channel transformation optimization, and I’m just curious how do you look at the development of both online and offline business?
So would you consider about the margin, because with the traditional business for supermarkets, et cetera, you don’t really make much money. So now with a very intense competition how do you look at different planning for different channels and their impact they’re off on your margins? Thank you.
Lu Minfang
Thank you. Let me take this question. Yes, indeed from 2023, for UHT optimization and high end product. It has grown very well and going forward the continuous optimization trend will stay for instance. We look at by quarterly performance, the overall trend is there and for our whole company the continued optimization will be further strengthened in our current product structure, whether it is room temperature for milk deluxe, or shiny metal or our fresh cheese, and fresh milk product et cetera.
So, we all have some excellent products. So, we don’t really worry about this. And secondly functional milk, is a trend as you say in your second question. We have also made some deployment. In addition, what are the further details and divisions of these functional drinks, and including in the UHT product and for the functions of the product and we have made a certain deployment, and certain arrangement.
And thirdly, talking about the changes of the channels, yes indeed, in China the change in the channel, is actually very fast and even faster than the overall faster moving consumer goods, and in offline there are also many channels. So not only just online and for the retail business, there’s a lot of challenge and pressure.
So regardless of what sort of a channel it is, it is all business for us. And for us, it’s really about how to do well in the detailed segment, detailed channels, and create a better synergy between online and offline business. Thank you.
Unidentified Analyst
Okay. Great. Thank you.
Operator
We now go into the media QA question. So we first of all welcome the journalist from a Junxing News Agency. Thank you. This is [Dai Xiaotong]. I have a question for Mr. Li. We can see that in Mengniu development strategy and that you focus on green development, you have also participated in the first climate change forum. And what is the progress in ESG development and what are the new deployment, and plans for this year? Thank you.
Li Pengchen
Thank you for your question. So two days ago, I participated in Hong Kong’s first Climate Change Forum, and this was co-organized with Hong Kong University and the Ministry of Environment in China. So our target is 2030 and 2060. And for Mengniu, and we want to achieve carbon neutral by 2050. So for the 14th five-year plan, and we have our green strategy.
And for the milk business, we can see that it’s a very long supply chain. So for Mengniu as a leader in our industry. And we are working hard on reducing the carbon emission in the whole industry. And for instance last year we have five major measures, and we have also expressed to our investors and journalists, and for instance the usage of energy as well as photovoltaic and the treatment of manure, the feed that we give to the cattle, et cetera. We’re trying our hardest to reduce the carbon emission from the upstream.
All our farms including modern dairy and [shungmui], et cetera. And in terms of the waste recycling usage, and has all increased and we have been able to reduce 85.2 tons of carbon emission. At the moment we have about 30 factories and in Yunnan we have carbon zero factory. And the last May in India, we have also been able to establish the first digitized factory.
And we have 100 people and with a production of RMB10 billion. And in terms of the energy, consumption has also reduced by 42%. And then downstream, we have the packaging business and we started with the green packaging and Mengniu is the first Chinese dairy company has said that by 2030 – we’ll achieve zero forest destruction. And so, this is a meaning about for instance soybeans and palm oil.
And last year our company has also established a green packaging team, and for June this year we will launch the first green packaging white paper for Mengniu. And all these policies, and we are pushing forward, for sustainable development of a Mengniu. Mr. Lu has also said that yesterday, a lot of the directors also pay a lot of attention to the sustainability development for Mengniu.
And I can tell you that we are ahead of our peers, and therefore our MSCI is AA. And we are the first comprehensive dairy company, to achieve this in addition with the Milk Deluxe and we are number one. And for instance, we are also included in Standard & Poor’s, first batch of sustainable development company.
And last year, we were also invited by the Ministry of Environment, to participate in the Climate Change COP Conference held in Dubai, and to represent Chinese companies and share our experiences. So for Mengniu as a leading company in terms of sustainability and in ESG, we continue to lead the whole industry, for the achievement of dual carbon and we are making contributions. Thank you.
Operator
We welcome the last question from the media. And we welcome this journalist from Xinhua News Agency.
Unidentified Analyst
Thank you. So at the moment in terms of the market, we pay attention to the new productivity. And in terms of building smarter productivity and what are the areas that Mengniu is considering?
Li Pengchen
So perhaps I’ll take this question again, and I have worked in Xinhua News Agency before, so it’s better that I can answer this question. And this question is a very important question actually. So this word smart, or new novel productivity is a new concept and this has provided Mengniu, with a strategic opportunity. And at the moment, there are many studies on this, so what is new and smart high quality productivity.
New as the name suggests is innovation and we have heard about HMO and my action et cetera. And HMO has resolved all the strangling issues. Another one is digitalized innovation, and digital innovation in Mengniu. We have already entered into era 3.0 from the demand and supply. So number three, and it’s about the innovation of the models, in terms of quality this word is about high quality development.
In Chinese dairy industry last year during the world dairy conference it’s about more nutritious, smarter and higher quality. This was put forward by Mr. Lu last year. And Mengniu, we are also grasping this opportunity of new high-quality productivity. And to continue to push forward the high-quality growth of Mengniu as a whole. In the interest of time, 2023 annual results of Mengniu has come to an end.
If you would like to know more about our detailed financial performance and the data, please go to our website, and to refer to the announcement made on the 26th of March. If you have further questions, please feel free to contact the IR team of Mengniu. In the meantime, we have also placed a lot of our products outside in the foyer. And we welcome you take our products and taste our products yourself.
Lu Minfang
Thank you very much for participating in our annual results today. And we will try our hardest, and to work in all the areas possible. Thank you and goodbye.
