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CNBC Transcript: Tan Yong Nang, CEO, Japfa

Below is the transcript of a CNBC interview with Tan Yong Nang, CEO, Japfa. The interview played out in CNBC's latest episode of Managing Asia on 24 July 2020, 5.30PM SG/HK (in APAC). If you choose to use anything, please attribute to CNBC and Christine Tan.

Christine Tan (CT): As an agri-food business in China, India, Vietnam, Myanmar and Indonesia, can you tell us the impact you felt when the pandemic first broke out in the early part of the year?

Tan Yong Nang (TYN): We are in the food business and we produce staple products, so we are an essential service. In fact, in many countries in which we operate, we are one of the leading players and we have very significant market share. It is really important for us that we continue to supply our products to the market in which we operate. Even with the initial lockdowns, a lot of countries, governments, regulators were very, very supportive and continued to push for our maximum production to feed the people. So, other than very initial teething problems where certain licenses were issued to us, a permit was issued to us but were not really well sorted out, they got sorted out very quickly within a couple of days. Thereafter, we were able to supply quite continuously. Now, the demand side is a bit more complicated than that. When we first started in the early part of the year, China was affected by the virus first. As such, we saw a bit of slowdown in China. Subsequently, we saw a recovery, especially in Q2. All the while, Vietnam was relatively not that much affected. Again, we are seeing pretty strong recovery also in Q2. I think Indonesia, together with Myanmar and India, they were affected a bit later. The worst time for us, I would say, in this country was probably April. Since then, we've seen slight recovery in May or June. Now, going forward, how is this going to impact us? It remains to be seen, depending how Covid pans out, so we wouldn't be able to tell quickly yet.

CT: When you look at your farming model, you essentially produce locally to sell locally. What was the initial feeling when the shut-downs started to happen in each of the countries that you operated in?

TYN: Luckily for us, as you said, we produce locally. A lot of the raw materials we source are local as well. By the nature of the business, we do have some stock for a certain period of time. So, even during lockdowns, we do have sufficient raw material supply to continue our day-to-day operations.

CT: Mr. Tan, when you look at overall at your swine, poultry, beef and dairy business, did you see a huge spike up in price as a result of the pandemic?

TYN: The prices are a function of demand and supply, and a function of economic purchasing power in the longer term. You had a couple of months where prices actually declined, and they sort of recovered fairly quickly as well. So, all in, I would say that we are relatively less affected by the whole Covid situation.

CT: Whether it's poultry in Indonesia, swine in Vietnam or dairy in China, your diversification is across five proteins and five countries. How much of your underlying strategy is lined up that helps you cope with the uncertainty and the volatility that comes out from events like Covid-19?

TYN: Our strategy is actually very well-placed and well-suited to handle the world today. Covid just happened to be one of those events. Also, interestingly, given that we are in the edible livestock business, we are quite used to handling disease or any kind of animal disease rather than a human kind of disease. I want to draw an analogy: Covid is like very, very strong headwinds, so in a situation of very strong headwinds, imagine that we are in a competition of boat sailing. In a boat sailing competition, we are not afraid of headwinds. In a tailwind situation, everybody moves forward very quickly. But it is only in the strong headwinds situation that I think we can see the difference. I can attribute how we handled it in three different dimensions or three different aspects. Number one, we do pursue a vertically-integrated business model. Take poultry as an example, we will start with the breeding site producing the real chicks. On the feed side, we produce feed. When we feed our feed, which is really dedicated for breeding offspring -- the DOCs (day old chicks), we then move on to our commercial operation. So, that gives us a fully-integrated model. For some of the operations, we do further produce into the secondary process and products like chicken nuggets, sausages and things like that. So, in that sense, we are allowed to play the full value chain and that puts us in an advantage. Just imagine, if you compete in a football competition, you'll have a full team, from defender to a striker. So, we do have a full team. Basically, we try to have uncorrelated revenue streams coming from different areas. Whether it is coming from India, China, Indonesia or Vietnam or coming from different types of proteins as you rightly point out. We have chicken, swine, milk, beef as well as aquaculture. So, it is really quite unlikely that you have a downturn in Indonesia's aquaculture, for instance, at the same time, there'd be a downturn in China's milk. So, all these are different revenue streams to give us some advantages in evening out all this volatility.

CT: For 2019, you pulled in revenue of US$3.9 billion dollars. Operating profit was 0.8% was lower than the previous year. Earnings wise, how do you expect to do this year?

TYN: Initially, we were actually a lot more cautious. As I said, April was not a great month for us, but all in all, I would say that we are still quite positive. All in, year to date basis, I think we're still quite positive. I think this year, we'll continue to see growth in all our segments. But not just about numbers, when I look at growth, I also look at our day-to-day operations, our people - are they growing? Are the businesses getting better? Are our businesses getting stronger? So, all in, I would actually say, overall, I'm cautiously optimistic.

CT: You're essentially selling to consumers in emerging Asia. If the pandemic continues to drag on, to what extent do you worry that it would start to hurt the purchasing power of the very consumers that you're trying to sell to?

TYN: Yes, definitely when do you have a major headwind like this, everyone is affected, but I'm glad to say that all in, we should be relatively least affected. One of the reasons: for a lot of people, the consumption of staples is not a choice, it's a necessity. We are operating in countries where a lot of the country's per capita consumption of protein is already very low. So, it's really difficult for them to cut down further. In the downstream side of operations, more and more people are going to the supermarkets to buy processed food from us. So, we are seeing a boost while on the B2B side, it seems to have slowed down a bit. So, they balance each other out. But clearly, if the overall world economy declines drastically, clearly, it would have an overall impact. But, for us, it seems to be quite muted. I think we will be in a good position to weather this and capitalize on the upturn when it comes.

CT: Because of the outbreak, because of the uncertainty, you've postponed I understand any new capital expenditure, is this all about conserving cash in his environment? Are you erring on the side of caution?

TYN: Yes, yes, definitely. I think we are quite cautious in terms of our capital expenditure. We do not postpone all the capital expenditure. Basically, when we do capex, it's all about matching with our anticipated demand. So, in the sense, if we think the demand is going to be a bit weaker, we'd just cut down our capex accordingly. When demand starts to pick up again, we will immediately increase our capex. For instance, instead of building 10 farms, we may build only five. One reason is that our capex is made up of small little items. We go farm by farm basis. We don't have to build mega plants. Instead of 10 farms, we can build five farms. So, that gives us a lot of flexibility in how you want to improve and increase our capacity.

CT: Japfa, the company that you head, deals essentially with raw proteins like poultry, swine, beef, dairy. The coronavirus outbreak has raised a lot of questions about food safety when it comes to dealing with live animals. What are you doing to make sure your employees at the farms and the livestock you're dealing with are healthy and safe?

TYN: Yes, actually, a lot of people don't realize that sometimes our farms are even safer than outside. If you go into our farms, you have to shower three times. You must immerse under water, before you can go to our farms. So, we try to keep our farms very clean and very hygienic. That is something where we emphasize a lot, which is our so-called biosecurity. So, to a certain extent, that actually protects our workers. So, we make sure that they have to be healthy before they can come to work. If they are not healthy after temperature checks and after certain questions, if they do not pass those tests, we actually ask them to go home. We are one of very few who continues to pay them fully, making sure that their welfare is being taken care of. So, when we take care of our staff, it is not just their physical well-being, we understand that in this Covid situation, a lot of people are worried about their financial well-being as well. So, that is an aspect that we also take care of.

CT: In the five countries that you operate in, did you have to deal with any infections?

TYN: Yes, we did have some. Some workers did get infected. So, basically, we had to send them home or to the hospital. But again, as I said, we are not seeing any major issue that affects our operations at all.

CT: At the peak of the crisis, you managed to sell a 25 percent stake in your China dairy business to a Japanese conglomerate Meiji. How exactly did the acquisition come about?

TYN: All the while, we have leveraged our balance sheet a bit in order to build up this dairy business. Just to give you a sense of numbers, we must have invested more than US$500 million in China for this business already. So, it does strain a lot of our resources. With Meiji coming in, we are able to deleverage the company. So, it put us in a better position for growth. At the same time, so happened that Meiji was also looking for a very dependable and independent quality milk supplier in China. So, we hit it on very quickly. I think we met up sometime early in the year, maybe just before Covid I believe. Since then, we have been using remote videoconferencing and things like that, and the deal was concluded very smoothly. I think largely because the two of us are clearly... we have a clear symbiotic relationship. We are really strong in the upstream producing very high-quality milk, while Meiji is having an aggressive plan to grow their downstream business in China. So, we really sort of fit in very nicely.

CT: What exactly does it mean to have Meiji as a shareholder, does it somehow open up the Japanese market for you?

TYN: No, our business model throughout has been to source locally, produce locally as well as sell locally. So, as far as Meiji is concerned, I do believe this is the China part of the business and they are thinking of aggressively growing in the downstream operations, and therefore they need a local milk supply. Japan will be a completely different issue.

CT: So, no interest at all to get into the Japanese market?

TYN: Yes, not at the moment. I just want to bring up my analogy of soccer team again. Today, we are very focused on China and I think we do have a very strong team to play in the China league. But for me to go into Japan at the same time, basically we would be splitting the team and diluting my resources. Clearly, as CEO, I never say no when it comes to expansions and opportunities, but I will say that in the near term, I would much, much like to focus on our China and existing five countries in which we operate.

CT: Japfa began as a poultry feed mill in Indonesia. Today, you have three key pillars. They are poultry in Indonesia, swine in Vietnam and dairy in China. What's the next phase of growth for the company?

TYN: There are other areas, other protein-based that are also very interesting. I told you about aquaculture. Today, we still have some small aquaculture business only in Indonesia. But you look at aquaculture, look at all the proteins, the next proteins that's very interesting is actually farmed fish, farmed seafood, farmed fish and farmed shrimps. I would say that maybe about 10 years ago, the culture of fish - aquaculture - has really overtaken sea catch. So, clearly that's an area that's going to be a major protein leader in the future. I'm not sure I can say that it's going to happen in this couple of years, but I think aquaculture division has been doing extremely well and improving in the last one or two years, and that will continue. I think one day that clearly can be our potential next pillar.

CT: When I look at your operations, is that ultimately your vision to have all five proteins including aqua that you talked about in all five markets that you operate in?

TYN: Well, that is the ultimate potential, but I think it all depends - on the country and on the opportunity. For instance, you just can't do swine in India. You can't do it in in Indonesia, obviously because of the background and culture of people there. They don't eat a lot of pork at all. So similarly, I think they can do well in poultry, they can do well in Myanmar. And because there's a major protein consumption. This cross-fertilization is clearly interesting. We started beef in Indonesia, now we are doing very well in beef in China as well. So, who knows? One day our milk business will not only be in China and Indonesia but go to India as well. India's a potentially huge milk market. Again, to me what's also very important is the timing of getting into this market. The market must be right, and at the same time, I must have the resources and the people to get into these markets as well.

CT: So, you produce locally and sell locally, any opportunity that you see to really export some of what you produce overseas?

TYN: That is not really our business model. If you look at our business, it does remove a lot volume. Let me give you an example: every day, we produce 2 million day-old-chicks and they need to be distributed throughout the countries. We produce a lot of feed that utilizes a lot of raw materials as well. So actually, the best cost-effective and most efficient way is actually be strong locally and sell locally rather than exporting. To some extent, that also insulate us from a lot of problems you see these days. More and more countries are trying to be self-sufficient. You do have some trade frictions and things like that. So, being local to a certain extent insulates us against those trends.

CT: As an agri-food company, you're facing the biggest competition from Thailand's CP group, which is many times bigger than you. Any plans to scale up in an aggressive way to could be better?

TYN: Yes, I think it's easy to say, scale up, but actually to do it is actually difficult. We are still much better at doing things organically. I think we have grown quite fast organically over the years. We'll continue to do so. Put it this way, we started in Indonesia about 50 years ago from nothing. Today, in Indonesia, I think we are neck-to-neck with CP. In all our countries, we are neck-to-neck with CP as well. So, our growth has been quite interesting. We'll continue that growth trajectory.

CT: You have over 40,000 employees working for you at your farms, your processing and your distribution facilities. When countries start to open up in each of these markets that you operate in, there are concerns and we are already seeing second waves of infection. What are you doing within Japfa to minimize future disruption at your operations?

TYN: Yes, even in my office here, we continue to encourage people to work from home, if possible. When they come to office or come to our factory, we need to measure their temperature, a standard procedure. So, we've implemented all these procedures. So, hopefully, that can mitigate us against any of these issues. Because of the scale that we have, we actually do have many, many plants, many, many farms all across different countries and different areas. So, if one or two of them are being affected by the disease, the rest of the operations continues to function. Diversification is key.

CT: Japfa's resilience, I understand, was challenged with the outbreak of the African Swine Flu (ASF) in Vietnam last year. What lessons did you learn that now puts the company in a better position to deal with future outbreaks?

TYN: Well, I would say this, as much as we have biosecurity, that is not fool proof. Nothing is fool proof. Animals are actually no different from human beings. I've never come across any person who has never fallen sick in their life. The question is, how do you prevent it? How do you minimize it? And how do you treat it? So, we are quite used to disease. Unfortunately, as African swine fever was a new disease that came along. Then, the question really is now how much are we affected relative to my competitors? My analogy of a sailboat right - in sailing, with a strong headwind, if you know how to handle your boat, you can move forward. Those who can't handle, they move backward or they can't move, right. As long as I can continue to produce under the ASF situation, much better than my competitors, I will have more pigs to sell related to my competitor. It is actually the prices that sometimes more than offset the drop in demand. I think you can see in the Q1 results, last quarter results of Vietnam seemed to demonstrate that as well. I think that will continue in the near-term as well. I think for the longer term, if many smaller, marginal players can't handle the situation, they will get out of it. They will get out of the market. So, there will be further market consolidation again which would benefit industrialized players like ourselves.

CT: As you gear up for our next phase of growth, I understand the biggest challenge you face is actually finding the people to hire to work for you. Farming is not exactly a very sexy business. How do you hire and attract staff?

TYN: Yes, first of all, I think you have to be a good company - to be fair and take care of your people. For us, very importantly, even when our workers are sick and things like that, we still pay them and make sure that we take care of their financial well-being. That's one of the key issues. But underlining that, a lot more significant is actually a lot of people do realize that we have a very noble purpose and our purpose is feeding Asians. Especially the younger generation, they get attracted by such a noble purpose. I think that is what will really help us and guide us as well.

CT: Finally, Mr. Tan, as CEO of Japfa, how do you intend to steer the company through this pandemic? Do you see any opportunity arising out of this crisis?

TYN: As long as we can weather this crisis, as long as we can continue to produce well, as long as we can continue to improve and increase our volume of production, it gives us a lot opportunity because I think there are other players, marginal players who may not be able to weather this situation like we do and those are really opportunity for us to move forward.

CT: Mr. Tan, thank you so much for talking to me. Please stay safe and well during this time.

TYN: Thank you, thank you. Same to you.

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